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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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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Why a 10-year census would be fine

What's the difference between a census – a full count – and a sample survey? The census will always be superior, right? Not really.

With talk that the Bureau of Statistics and the government are considering changing our census of population and housing from five-yearly to 10-yearly and making up for this with regular sample surveys, the difference between the two has suddenly become a question of interest to more people than just students of statistical theory.

Since all of us have to fill in the census form, many people have opinions on the topic. And it seems from the feedback backbenchers are getting that some of us quite enjoy census night. There's a feeling of togetherness as families across the land sit up answering a seemingly unending questionnaire for each person in the family.

In principle, a census provides a true measure of the population because, by definition, it doesn't involve any risk of sampling error. But if you think that makes censuses foolproof, you're mistaken.

For a start, in practice you fall well short of a 100 per cent "enumeration". When you've got to get forms from everyone, no matter how elusive or remotely located, you're bound to come up short. So you have to adjust the figures for this undercount, which you do by (get this) conducting a "post-enumeration survey".

For another thing, the answers you collect may be wrong, because people misunderstood the question or are being less co-operative than they should be. Errors in the census are both expensive and difficult to reduce.

Censuses are conducted on a particular day, which may or may not be representative of other times during the year. From that day on, the counts become ever-more-outdated. The things we're measuring are often too important for us to wait another five years for another count, but anything you do to update the figures in the meantime won't have the same certainty as a census.

Attempting to question every person in the country is such a huge exercise that it's hugely expensive. The census in 2011 cost taxpayers about $440 million. And because there's so much data on so many subjects, it takes ages to process. The figures can be maybe two years old before we get to see them.

It's such a major exercise that the bureau begins planning the next census two years before the latest one has been conducted.

A big part of the reason some people have been dismayed by news that a move from five- to 10-yearly censuses is being considered is that they've heard only half the story. They know what they'd lose, but not what would be put in its place. Researchers and interest groups who make great use of a particular part of the census have visions of going 10 years between drinks.

But another part of the problem, I suspect, is that a lot of people don't know much about the wonders of the science of statistics, a branch of mathematics that draws particularly on probability theory.

One way of thinking of statistical science is that it's the study of ways to be sure you're drawing accurate conclusions from a bunch of puzzling data. Another way is that statistics is the search for ways to draw accurate conclusions about a "population" (of people, things or events, such as all the road accidents in Victoria in 2014) as quickly, easily and cheaply as possible.

Get it? Statistics is the discovery of mathematical tricks that allow us to avoid all the hassle, delay and cost involved in always having to do censuses of this, that and the other.

The truth is that, as interestingly told by an article in the Christmas issue of The Economist, we've made great strides in this just since World War II.

In which case, why shouldn't we take advantage of this technological advance, just as we unhesitatingly take advantage of advances in computer science? Why run to the great expense of frequent censuses when we can get results that are almost as reliable, and in other respects better, much more easily, quickly and cheaply by using sample surveys?

That, after all, is why we've developed sampling theory – being able to take just a small sample of a population and draw accurate conclusions about the characteristics of that population.

The trick to sampling is to ensure the sample has been drawn at random from the population – to be sure it's representative of that population – and to ensure the sample is large enough to make conclusions reliable.

Sampling theory tells us how big a random sample needs to be, given the size of the population. It does so using probability theory. In the case of the population and housing census, we get information about innumerable, quite small sub-populations – such as the proportion of dwellings in the Sydney CBD that are owned outright by owner-occupiers. The smaller the sub-group, the bigger the sample needs to be to maintain accuracy.

The Americans conduct their census only every 10 years and keep it very short. But they make up for this by having an annual survey of the population covering a host of questions, with a sample size of (get this) three million households, representing 1 per cent of the population.

It seems that if we decide to go to 10-yearly censuses, we'll introduce a similar, detailed annual survey, with a sample size covering about a million people. (Our present monthly household survey – from which we get our estimates of unemployment – covers about 55,000 people.)

This would leave us with a 10-yearly census to "benchmark" all our surveys against, but give us much more frequent, less outdated, accurate information about a host of census topics, doing so more flexibly.

It would do so quickly, easily and much more cheaply, enabling us to spend the saving on replacing the bureau's ancient computer systems.

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How Australia's supply of labour is changing

The trouble with the way the media report developments in the labour market from one month to the next is that we don't get a sense of the major shifts that occur over time.

So today let's take a much longer view, examining the trends over, say, the two decades from 1993 to 2013. We'll do so with help from an article by Professors Roger Wilkins and Mark Wooden, of the Melbourne Institute, published in the latest issue of the Australian Economic Review.

Note that this period covers most of the continuous economic upswing since the severe recession of the early 1990s. So most of the trends are reasonably good. It's true, however, that we were knocked off track briefly by the global financial crisis of 2008-09 and in more recent years have suffered a slow deterioration in unemployment as the economy makes heavy weather of the end of the mining investment boom.

But that's getting ahead of the story. Actually, it's such a long story that today I'll limit it to the side that gets least attention from the media, changes in the supply of labour. It's best measured by changes in the "participation rate" – the proportion of the population of working age who are participating in the labour market by making their labour available, either by having a job or actively seeking one.

Taken overall, the "part rate" increased pretty strongly until 2008, when it began falling back. But all of this overall increase is explained by the increased participation of women, particularly those of prime age, 25 to 54.

There's been a long-term slow decline in the participation of men. It's explained partly by young males staying longer in the education system but mainly by older workers retiring earlier – voluntarily or otherwise.

But here's where the story gets complicated. The trend to earlier retirement turned around at about the turn of the century, with participation by both men and women aged 55 and over rising significantly.

Got that? Now try this. Although more people are retiring later, the part rate reached a peak in 2008, has fallen since then and is likely to continue falling for years yet. Why? Because of the ageing of the population.

The trick is that even if the part rate is now rising in older age groups, population ageing means that an ever-rising proportion of the labour force is in those older age groups, whose rates of participation will always be a lot lower than the rates for people of prime age.

To show the significance of this ageing effect, the authors calculate that if the age structure of the population in 2013 was the same as in 1993, the overall part rate would be 2.2 percentage points higher than it actually is.

However, we do have some scope to moderate this demography-driven decline in participation. Wilkins and Wooden note that the rates of participation for 55 to 64-year-olds are between 7 and 14 percentage points higher in New Zealand than they are in Oz. If the Kiwis can do it, what's to stop us doing it?

The part rate covers the quantity of people willing to supply their labour, but there's also the question of changes in the quality of the labour being supplied.

The past 20 years have seen a big improvement in the skills – education and training – of the labour force, with the proportion of university graduates more than doubling from 12 per cent to 28 per cent. The proportion with any post-secondary qualification rose from less than 46 per cent to more than 62 per cent.

By the way, it's likely that the continuing rise in women's participation is largely explained by the dramatic increase in females' academic attainment. The higher men and women's level of education, the greater the likelihood they'll be in the labour force – exploiting the commercial value of their skills – and the less the likelihood of them being unemployed.

Of course, another part of the labour supply story is immigrant workers. Immigration has long been a major source of additional labour and today accounts for more than a fifth of the labour force. What's changed is that throughout the last century most migrants came on permanent visas, whereas today most come on temporary visas.

In March last year there were almost 900,000 people on temporary visas with work rights, including more than 200,000 on "457 visas" for skilled people and about 370,000 on student visas. If all these people actually participated they'd amount to 7 per cent of the labour force, the authors estimate.

Separate to this were almost 650,000 people on the special visas for New Zealanders, some of whom will prove to be only temporary residents. (Don't forget Aussies have reciprocal rights to work in Kiwiland.)

We now grant about 125,000 457 visas a year and about 100,000 student visas a year. This compares with about 130,000 old-style permanent visas a year to skilled immigrants, many of which are given to people already here on temporary visas.

The authors observe that the shift towards temporary migration has probably had a big effect on the labour market.

"The availability of a flexible skilled immigrant workforce that can respond to changes in labour demand relatively quickly is likely to have improved the operation of the labour market, especially from an employer perspective," they say.

Oh. Yes. To me the main drawback is not so much that employers may not try hard enough to find local workers to fill jobs, or that the availability of this external supply may limit to some extent the rise in skilled wages, but that it reduces employers' incentive go to the bother of training young workers.

Still, we mustn't forget that, these days, the economy is run for the benefit of business, not the rest of us.

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Why house prices will stay high

Why are house prices so extraordinarily high? Short answer: because Australians have an unusual relationship with their homes. The reasons for that strange relationship aren't new, but until now they haven't been well understood. And among foreigners they still aren't.

House prices in cities such as Sydney and Melbourne don't just seem high to you and me, they're high by international standards. According to the International Monetary Fund, Australia has the third highest house prices, relative to the level of people's incomes, among 24 advanced economies.

Our house prices are so high that just about every foreign economist who looks at them becomes convinced we're sitting on a bubble that could burst at any moment. But few Australian economists agree with them.

Though there's no guarantee prices will keep shooting up the way they have been lately and nothing to stop them falling back a bit - there's plenty of precedent for periods of either stable or falling house prices in our recent history - most local economists see little prospect of an American-style collapse in prices.

But what is it that's holding our prices so high? For the full explanation of Australian exceptionalism I'm relying on a typically thorough report by one of our top business economists, Saul Eslake, of Bank of America Merrill Lynch.

Much of the explanation comes from the insights of economic geography, the study of how we're affected by the spatial dimension of the economy and, in particular, of the way big cities work.

Eslake says foreigners tend to think of Australia as a country of wide-open spaces - "a land of sweeping plains" - where people live with kangaroos grazing peacefully on their front lawns. In truth, most of us live on the edge of the continent, crammed into a few very big cities, making us one of the most urbanised countries on the planet.

Almost 60 per cent of Australians live in cities with populations of more than one million, a proportion exceeded only by Japan, Hong Kong and Singapore. Of our six state capitals, all but Hobart fit that description.

Urban geography research suggests real estate prices are usually a lot higher in cities with populations of more than a million. So an unusually high proportion of Australians live in big cities where house prices are safe to be higher.

Second, compared with cities in other countries, Australian cities are large in terms of area, relative to the size of their populations. Trouble is, Eslake says, public transport and arterial roads in the outer suburbs of Australian cities are generally inadequate for the task of moving large numbers of people from those suburbs to the central business district.

But, because of this, many Australians choose to spend a higher proportion of their incomes on housing so as to spend a smaller proportion of their time commuting. In the process, we bid up the prices of houses and units closer in.

So houses prices are higher in Australia partly because commuting times are so long. The recent return of the delusion that building more expressways will reduce traffic congestion is unlikely to make things better.

Third, Australian house and apartment prices are higher because our homes tend to be bigger than those in other countries. Three-quarters of us live in detached houses, a much higher proportion than in most other rich countries. Our average size of a new house - 206 square metres - is a fraction higher than America's, with daylight third. And our housing is usually constructed using more expensive materials.

The international comparisons purporting to show how expensive our houses are never allow for differences in size and quality. If our housing is of higher quality than other people's, you'd expect it to cost more.

Eslake's fourth point is that, thanks partly to the resources boom and two decades without a severe recession, Australians are richer than we were, even relative to other high-income countries. Guess what? Better-off people tend to devote a higher proportion of their income to their housing.

We can afford to, so we do. Sounds pretty Australian to me.

Another part of the explanation is that, for more than a decade, we've been building too few houses and units to keep up with the growth in the population. Since the turn of the century we've had relatively fast growth averaging 1.4 per cent a year with 60 per cent of that coming from immigration.

During the 1990s we built 145,000 new dwellings a year, but though the annual increase in the population has doubled since then, our construction of new places has averaged just 150,000 a year. It was estimated that by June 2011 we'd built 284,000 fewer homes than needed to maintain housing patterns the way they were.

Supply isn't keeping up because of excessive restrictions and charges by state and local authorities. So this is putting some upward pressure on house prices. But it's just the opposite of what happened in most of the countries where prices tanked.

Finally, Eslake argues that a further part of the reason our house prices are so high is our unusual tax incentive encouraging people to invest in residential housing. It wouldn't be so bad if it added as much to the supply of homes as it adds to the demand for them but, in fact, 94 per cent of "negatively geared" investors buy established dwellings, not new ones.

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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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The two speeds not as far apart as claimed

Some people spent much of this year worrying about how the two-speed economy was affecting the south-eastern states. There was concern Victoria was on the brink of recession and South Australia and Tasmania were already in one.

So when, a week or two back, the Bureau of Statistics finally published the figures for the real growth in the various states' gross state product last financial year, 2011-12, there would have been great interest from the media, right?

Wrong. The only definitive figures we've had for economic growth by state for the past 12 months went virtually unreported.

Why? Because they were a bit dated? No. More likely because they showed no sign of recession. They also showed the gap between the fast and slow states to be narrower than we'd been led to believe.

Turns out we did a lot of worrying for nothing, misled by figures we should have known are always misleading.

The unreported figures show Victoria's gross state product grew by 2.3 per cent for 2011-12 as a whole, just a fraction less than NSW's 2.4 per cent. South Australia grew by 2.1 per cent and even Tasmania pushed ahead by 0.5 per cent.

By contrast, Queensland grew by 4 per cent and Western Australia by 6.7 per cent. Overall, gross domestic product (the national measure) grew by a respectable 3.4 per cent.

A point to remember, however, is that the populations of the states are growing at quite different rates and this accounts for part of the difference in the rates at which their economies are growing. Only to the extent a state's gross state product per person is increasing is it better off materially.

Nationally, economic growth of 3.4 per cent in 2011-12 drops to 1.8 per cent per person. Queensland's growth drops from 4 per cent to 2.2 per cent, while WA's drops from 6.7 per cent to 3.7 per cent.

Not quite so much cause for envy.

If you recollect reading during the year figures a lot more dramatic than these, you're right, you did. As I say, definitive figures for gross state product are published only once a year, on an annual basis. The figures the bureau publishes each quarter as part of the national accounts are for something quite different: state final demand.

These figures are always widely reported by the media, with journalists happily assuming SFD and GSP must surely be pretty much the same thing. Trouble is, they're not. And the media's insistence on reporting these largely meaningless figures means the public is regularly misled about the extent of differences between the state economies.

State final demand and gross state product would be pretty much the same thing if the states' shares of Australia's exports and imports never changed and, more to the point, if there was no trade between the states.

It shouldn't surprise you there's a lot of trade between the states. Nor should it surprise you the mining states import a lot more from the other states than they export to them. The other side of the coin is the other states - particularly NSW and Victoria - export more to the mining states than they import.

This trade between the states spreads the benefits of the resources boom around the continent. In consequence, the much-quoted state final demand figures tend to overstate how well the mining states are doing and understate how well the other states are doing.

That's how the recession furphy got started.

Consider this. According to the latest figures for 2011-12, WA state final demand of 13.5 per cent turned into gross state product of 6.7 per cent, while Queensland's final demand of 8.6 per cent was more than halved to 4 per cent.

By contrast, Victoria's final demand of 2.2 per cent was increased a fraction to gross product of 2.3 per cent, while NSW's final demand of 2 per cent was increased to 2.4 per cent.

SA's final demand and gross product were the same at 2.1 per cent (meaning it neither wins nor loses from the inclusion of international and interstate exports and imports), while Tasmania's final demand growth of zero was increased to gross product growth of 0.5 per cent.

You see how misleading those quarterly state final demand figures are. They exaggerate the true extent of the differences between the states.

So why do the media make so much of them? Because, at a time when the resources boom is doing so much to change the industry structure of our economy, there's much interest in what this is doing to the respective sizes of the state economies.

The quarterly state final demand figures don't give reliable answers to this question, but they're the best that regularly come our way.

But also because the ever-intensifying competition between the news media has prompted them to select their news on the basis of all care but no responsibility. If some information is interesting or controversial it will be published, even if the journalists know or suspect it's dodgy. After all, if I don't do it, my competitors will.

The relative sizes of the six state economies have been changing since federation, partly - but not solely - because of their differing rates of population growth. But, though it's possible to exaggerate the extent to which the resources boom is causing the mining and non-mining states to grow at different rates, the states' relative sizes have been changing particularly rapidly in recent years.

Those recent figures no one bothered to report, known as the State Accounts, showed how the states' shares of overall gross domestic product have changed over the eight years to 2011-12.

In that time, NSW's share has dropped 3.8 percentage points to 30.9 per cent. Victoria's share has dropped 2.6 points to 22.3 per cent.

By contrast, Queensland's share has increased 1.7 points to 19.3 per cent, while WA - which long ago overtook SA in the pecking order - had its share increase a remarkable 5.4 points to 16.2 per cent of overall GDP.

That leaves SA's share falling 0.8 points to 6.2 per cent and Tassie's falling 0.3 points to 1.6 per cent. Its share is now less than the ACT's (2.2 per cent) and only a fraction greater than the Northern Territory's (1.3 per cent).

Whether we like it or not, the shape of our economy is changing.

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Endless growth and a healthy planet don't compute

Do you ever wonder how the environment - the global ecosystem - will cope with the continuing growth in the world population plus the rapid economic development of China, India and various other "emerging economies"? I do. And it's not a comforting thought.

But now that reputable and highly orthodox outfit the Organisation for Economic Co-operation and Development has attempted to think it through systematically. In its report Environmental Outlook to 2050, it projects existing socio-economic trends for 40 years, assuming no new policies to counter environmental problems.

It's not possible to know what the future holds, of course, and such modelling - economic or scientific - is a highly imperfect way of making predictions. Even so, some idea is better than no idea. It's possible the organisation's projections are unduly pessimistic, but it's just as likely they understate the problem because they don't adequately capture the way various problems could interact and compound.

Then there's the problem of "tipping points". We know natural systems have tipping points, beyond which damaging change becomes irreversible. There are likely to be tipping points in climate change, species loss, groundwater depletion and land degradation.

"However, these thresholds are in many cases not yet fully understood, nor are the environmental, social and economic consequences of crossing them," the report admits. In which case, they're not allowed for in the projections.

Over the past four decades, human endeavour has unleashed unprecedented economic growth in the pursuit of higher living standards. While the world's population has increased by more than 3 billion people since 1970, the size of the world economy has more than tripled.

Although this growth has pulled millions out of poverty, it has been unevenly distributed and has incurred significant cost to the environment. Natural assets continue to be depleted, with the services those assets deliver already compromised by environmental pollution.

The United Nations is projecting further population growth of 2 billion by 2050. Cities are likely to absorb this growth. By 2050, nearly 70 per cent of the world population is projected to be living in urban areas.

"This will magnify challenges such as air pollution, transport congestion, and the management of waste and water in slums, with serious consequences for human health," it says.

The report asks whether the planet's resource base could support ever-increasing demands for energy, food, water and other natural resources, and at the same time absorb our waste streams. Or will the growth process undermine itself?

With all the understatement of a government report we're told that providing for all these extra people and improving the living standards of all will "challenge our ability to manage and restore those natural assets on which all life depends".

"Failure to do so will have serious consequences, especially for the poor, and ultimately undermine the growth and human development of future generations." Oh. That all?

Without policy action, the world economy in 2050 is projected to be four times bigger than it is today, using about 80 per cent more energy. At the global level the energy mix would be little different from what it is today, with fossil fuels accounting for about 85 per cent, renewables 10 per cent and nuclear 5 per cent.

The emerging economies of Brazil, Russia, India, Indonesia, China and South Africa (the BRIICS) would become major users of fossil fuels. To feed a growing population with changing dietary preferences, agricultural land is projected to expand, leading to a substantial increase in competition for land.

Global emissions of greenhouse gases are projected to increase by half, with most of that coming from energy use. The atmospheric concentration of greenhouse gases could reach almost 685 parts per million, with the global average temperature increasing by 3 to 6 degrees by the end of the century.

"A temperature increase of more than 2 degrees would alter precipitation patterns, increase glacier and permafrost melt, drive sea-level rise, worsen the intensity and frequency of extreme weather events such as heat waves, floods and hurricanes, and become the greatest driver of biodiversity loss," the report says.

Loss of biodiversity would continue, especially in Asia, Europe and southern Africa. Native forests would shrink in area by 13 per cent. Commercial forestry would reduce diversity, as would the growing of crops for fuel.

More than 40 per cent of the world's population would be living in water-stressed areas. Environmental flows would be contested, putting ecosystems at risk, and groundwater depletion may become the greatest threat to agriculture and urban water supplies. About 1.4 billion people are projected to still be without basic sanitation.

Urban air pollution would become the top environmental cause of premature death. With growing transport and industrial air emissions, the number of premature deaths linked to airborne particulate matter would more than double to 3.6 million a year, mainly in China and India.

With no policy change, continued degradation and erosion of natural environmental capital could be expected, "with the risk of irreversible changes that could endanger two centuries of rising living standards". For openers, the cost of inaction on climate change could lead to a permanent loss of more than 14 per cent in average world consumption per person.

The purpose of reports like this is to motivate rather than depress, of course. The report's implicit assumption is there are policies we could pursue that made population growth and rising material living standards compatible with environmental sustainability.

I hae me doots about that. We're not yet at the point where the sources of official orthodoxy are ready to concede there are limits to economic growth. But this report comes mighty close.

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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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The deficit we really should worry about

The biggest and most worrying deficit in this election campaign has been the policy deficit: the reluctance of both sides to debate any aspect of economic management bar the budget.

What has passed for economic debate has proceeded from the proposition that the federal budget equals the economy. So let's see if we can get through a discussion of our economic policy challenges without further mention of that instrument.

The most obvious disappointment about this campaign is both sides are pledging to do nothing serious in the coming three years about the greatest and most pressing threat to the economy: climate change.

Left unchecked, climate change is likely to destroy or significantly damage much of our stock of private and public physical capital. To avoid the small cost of growth forgone as we tackle the problem, we're willing to risk incurring much greater losses.

Because of both sides' unwillingness to impose on voters unpleasantness roughly akin to the introduction of the goods and services tax, they're willing to waste taxpayers' money on ineffective incentive schemes while also causing the cost of eventual action to be higher than it need be. (That's assuming we wake up before we reach the point where the damage has become irreversible.)

At a more conventional level, the glaring need neither side seems to have noticed, much less wanted to do anything about, is what could be called our productivity deficit: after perking up mightily in the 1990s, our rate of productivity improvement - measured as output per hour of labour - slumped throughout the noughties.

What should we be doing to lift our productivity performance? That's what we should have been debating over the past five weeks. Failing that, it's a question we should be setting our minds to during the coming parliamentary term.

One reason we haven't had more soul-searching over the productivity deficit is that its adverse effect on our rate of economic growth - and continually rising material living standard - has been offset by the resources boom.

National income has been growing strongly because the world has been paying so much more for our coal and iron ore and because investment in new mines and facilities has been so strong. This looks likely to continue for some years yet.

But with this easy prosperity come two challenges: cyclical and structural. The mildness of the recession means we're already close to full employment, so it may not be long before the Reserve Bank is struggling to control a booming economy with interest-rate rises.

Neither public nor politicians has any real understanding of the way being at full employment constrains our ability to press ahead with every job-creating project we dream up. We're locked in a deficient-demand world view.

The structural problem has two elements: worrying about the perceived Dutch Disease problem (the temporarily high exchange rate wipes out other export industries, particularly manufacturing and tourism, so we're left with a vacuum when the resources boom ends) and deciding how to ensure we gain some lasting benefit from all the extra revenue flowing into government coffers.

If we're not careful we could end up with the same disastrous solution to both problems: pumping a lot of taxpayers' money into propping up declining manufacturing industries in the name of "value-adding". Their weak performance in this campaign suggests both sides are capable of such madness.

Our non-mining future lies in high-value services, not manufacturing, so the right answer is to increase our public (and private) investment in education, training and research. All such investment should raise our productivity in due course.

We all know our present social and economic infrastructure leaves much to be desired. We'll need to put a lot more money into it but this campaign's obsession with that thing I promised not to mention again suggests that, whoever wins, we won't be spending (and thus borrowing) as much as we need to.

Infrastructure investment adds to demand in the short term but also adds to supply (production capacity) in the medium term and productivity improvement (output per unit of input) in the longer term.

So, remembering our full-employment constraint, a great challenge facing the economic managers will be to (temporarily) constrain consumer spending to make room for more business investment and public infrastructure spending.

How? Good question. Maybe we could speed up the phased increase in compulsory superannuation saving.

Remember, however, that part of the solution to inadequate infrastructure is to use the existing infrastructure more efficiently. That means better pricing of it (with the net proceeds from that pricing also helping to fund additional investment). But better pricing requires a little political courage, something neither side has displayed in this campaign.

One area where supply-side reform is urgently needed is housing, where housing construction has fallen well behind the formation of additional households, forcing up house prices and rents. We need to remove the state and local governments' obstructions to medium-density housing and the release of serviced land.

The issue of population growth and immigration was raised in the campaign but not properly debated because both sides were just using it to dog-whistle about boat people.

The unthinking advocates of high immigration need to understand it makes a negative contribution to productivity improvement (by worsening the ratio of physical capital to labour) and demands increased investment in business equipment, housing and public infrastructure.

Unless the goal is growth for its own sake, it's a dumb way to go about raising material living standards (except those of the immigrants). It also greatly increases our difficulty in achieving targets for the reduction of our emissions of greenhouse gases.

It's all very well for the advocates of high immigration to say the underlying problem is one of inadequate infrastructure, not immigration as such. What do they propose to do about it - abolish the states? Who will pay for the extra infrastructure (on top of the existing backlog) and how will it be financed? By privately issued, but heavily publicly subsidised (and at least implicitly government-guaranteed) infrastructure bonds? That'll fix it. Not.

We do need to undertake a careful, evidence-based examination of what is a "sustainable" population, in which the economists, technological optimists and natural scientists box it out. All sides need to confront the elements of truth in the other sides' positions.

All this is what Julia Gillard and Tony Abbott should have debated over the past five weeks, but didn't. Whoever wins, the economy will lose.

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Stop beating about the bush and talk about Big Australia

Something significant has happened in this hollow, populist election campaign: the long-standing bipartisan support for strong population growth - Big Australia - has collapsed. Though both sides imagine they're merely conning the punters, it's hard to see how they'll put Humpty Dumpty together again. Which will be no bad thing.

The original bipartisanship was a kind of conspiracy. The nation's business, economic and political elite has always believed in economic growth and, with it, population growth, meaning it has always believed in high immigration.

Trouble is, stretching back to the origins of the White Australia policy, the public has had its reservations about immigration. Hence the tacit decision of the parties to pursue continuing immigration, but not debate it in front of the children. That's why we've never had a formal population policy.

John Howard used his harsh treatment of boat people to divert attention from his rapidly growing immigration program. Kevin Rudd continued the high immigration, but without the camouflage.

Growing punter angst about the return of the boat people collided with Rudd's announcement of Treasury's latest projection that, given various assumptions, the population could reach 36 million by 2050 and his happy confession to believing in a Big Australia. The punter reaction was negative. Rudd never used the phrase again, but appointed a minister for population whose main job was to repeat that the 36-million figure was merely a Treasury projection, not a policy or a target.

Fanned by the shock jocks and an opportunist opposition, the angst about boat people grew. In her efforts to neutralise the asylum-seeker issue - and, no doubt, informed by focus-group research - Julia Gillard judged it necessary to say she did not believe in a Big Australia. She wanted an Australia that was sustainable, and had added that word to the population minister's title.

But then she claimed population had nothing to do with either natural increase or immigration, which suggests her intention was to make soothing noises rather than change policy. Not to be outdone, Tony Abbott popped up with a policy to get immigration to levels "we believe are economically, environmentally, and politically, if you like, sustainable". He planned to rename the Productivity Commission the productivity and sustainability commission and get it to advise which population growth path it considered sustainable.

Gillard and Abbott have attracted criticism from commentators wedded to the old way of doing things, but the end of the conspiracy of silence is a good thing. Whatever the public's reasons for frowning on immigration, it does have disadvantages as well as advantages and the two ought to be weighed and debated openly.

The two leaders' adoption of the term "sustainable" has been attacked as vacuous - who, after all, would want any policy that was unsustainable? - but we do need to be sure the population policy we're pursuing is sustainable. That, in Abbott's words, it does not "rob future generations of the quality of life and opportunities we currently enjoy".

It's true politicians and economists have used the term to mean whatever they've wanted it to mean, but that's why it needs to be held up to the light. I suspect those scientists who argue we're close to the limits of our natural environment's "carrying capacity" are right, and the economists' airy argument that technological advance will solve all problems is wrong.

So let's get both sides out of their corners to debate the issue in front of us. We can't continue treating the economy like it exists in splendid isolation from the natural environment. And even when you ignore the environmental consequences, the proposition that population growth makes us better off materially isn't as self-evident as most business people, economists and politicians want us to accept. Business people like high immigration because it gives them an ever-growing market to sell to and profit from. But what's convenient for business is not necessarily good for the economy.

Since self-interest is no crime in conventional economics, the advocates of immigration need to answer the question: what's in it for us? A bigger population undoubtedly leads to a bigger economy (as measured by the nation's production of goods and services, which is also the nation's income), but it leaves people better off in narrow material terms only if it leads to higher national income per person.

So does it? The most recent study by the Productivity Commission found an increase in skilled migration led to only a minor increase in income per person, far less than could be gained from measures to increase the productivity of the workforce.

What's more, it found the gains actually went to the immigrants, leaving the original inhabitants a fraction worse off. So among business people, economists and politicians there is much blind faith in population growth, a belief in growth for its own sake, not because it makes you and me better off.

Why doesn't immigration lead to higher living standards? To shortcut the explanation, because each extra immigrant family requires more capital investment to put them at the same standard as the rest of us: homes to live in, machines to work with, hospitals and schools, public transport and so forth.

Little of that extra physical capital and infrastructure is paid for by the immigrants themselves. The rest is paid for by businesses and, particularly, governments. When the infrastructure is provided, taxes and public debt levels rise. When it isn't provided, the result is declining standards, rising house prices, overcrowding and congestion.

I suspect the punters' heightened resentment of immigration arises from governments' failure to keep up with the housing, transport and other infrastructure needs of the much higher numbers of immigrants in recent years.

This failure is explained partly by the rise of Costelloism - the belief all public debt is bad - but mainly because the federal hand has increased immigration while the state hand has failed to increase housing and infrastructure.

At its best, the message to the elite from the unwashed of the outer suburbs is: if you want more migrants, first get your act together.

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Show us your ticker, Gillard, before we vote

Excuse me, but what's the tearing hurry? We've had a new Prime Minister for five minutes, but we're being rushed off to an election before we can get her measure. Why? Is there a fear, if the election were delayed until October, the gloss would have worn off and we'd see Julia Gillard in a less hopeful and flattering light?

Is the new leader's fleeting honeymoon all that stands between Labor and electoral defeat? Is Labor's record in government that bad? Is Tony Abbott such a formidable opponent?

I'm not impressed by what we've seen of the Gillard government so far. We've seen the triumph of political expediency over good government. From her first day she's left little doubt three running political sores - the mining tax, resentment of boat people and the vacuum left by Labor's abandonment of its emissions trading scheme - needed to be staunched quick smart if the government's re-election were to be secured.

But what hasty, amateurish patch-up jobs we've seen. Wayne Swan has fudged up figures purporting to show the revenue cost of the deal done with the three biggest mining companies was minor, whereas sharemarket analysts are saying the extra tax to be paid by the companies will be minor. Then we had the fearful muddle over the Timor solution the Timorese hadn't agreed to, and now we're getting the climate change policy you have when you don't have a climate change policy.

The trouble with all this is it's terribly reminiscent of Kevin Rudd. Lacking in courage, not thought through and thrown together at the last moment. None of these stop-gap solutions will have been legislated before the election. So is that to be Gillard's agenda for Labor's second term: finishing off all the stuff not finished in the first term? Is that to be as inspiring as it gets? First re-elect my government and then I'll have time to think up my own agenda?

I'm sure the government has plenty of announcements up its sleeve to make between now and election day, but I'm not sure they'll add up to anything more than a grocery list. Bit of this, bit of that, tinker with this, fine-tune that. Nothing controversial, of course, and (given the budget deficit) nothing too expensive.

Before we vote on whether to retain Gillard we need to know a lot more about her and, more particularly, where she proposes to take us.

She tells us she believes in hard work, egalitarianism and the value of education, and she's proud of her mum and dad. I doubt if there are many who'd disagree, but if that's as big as her vision gets she's not ready to be our leader.

One of Rudd's biggest problems was he couldn't set priorities for himself. He took on too much, wanted the biggest and best in everything, and ended up not getting much achieved. He took on a couple of big economic reforms - the emissions trading scheme and the resource rent tax - but took them far too cheaply, underestimated the amount of explaining that needed to be done, then when the going got tough, turned turtle.

So what are Gillard's priorities? What does she plan to devote most of her attention to at the expense of all the other things she could focus on? Does she know but doesn't want to tell us, or hasn't she had time to think about it? Will she work it out as she goes along?

We know, despite her protestations, climate change won't be one of her second-term priorities. She says (correctly) we need to put a price on carbon, but then says she won't get ahead of public opinion and won't act on a carbon price until after 2012. Her next term will be spent doing the explaining that should have been done this term.

I fear most of what passes for economic debate in the election campaign will be of little consequence. Labor dumped its emissions trading scheme and emasculated its resource super profits tax for fear of being accused of introducing "a great big new tax", but that won't stop both sides accusing each other of planning to do just that.

Both sides will express their determination to get the budget into surplus as soon as possible and eliminate our (tiny) public debt post haste, while accusing the other of profligacy.

If there's one thing we don't need to worry about it's deficits and debt. Why not? Because we worry about it so much. The Libs make such a fuss about it it's a crime Labor wouldn't dare to commit.

The big economic issues facing us include how we'll make room for a greatly expanded mining sector in an economy already close to full employment, whether there's more tax reform in the Henry report we should be getting on with, and how we'll fix the ever-growing shortage of housing, including improving public transport to make homes in the outer suburbs more accessible.

Far from spending the next three years chatting about whether to get serious about combating climate change, we need to debate our unquestioned commitment to unlimited economic growth.

Does ever-rising affluence - much of it used to fuel an unending status competition - make us happier as both sides of politics assume? Are we paying a hidden price for it in damage to our family and social relationships? Is it really possible for the rich world to keep increasing its consumption of natural resources while the developing world - led by China and India - rapidly raises its standard of living towards Western levels without this irreparably damaging the ecosystem?

A bit too much for a prime minister from the left desperate to prove she's not left-wing? Far too threatening a subject for either of the political parties? I fear so. Much safer to have a furious argument about great big new taxes and the budget deficit.

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Population fall poses immense new challenges

Peter Costello used to say demography is destiny. Like many of the things he said, that's an exaggeration. But it is going to have a big effect on your future.

Demography is the study of human populations. In principle, it's quite separate from economics. But economists are likely to be saying a lot more about it - and boning up on it - because demographic change will have a big effect on the thing they care about most: the growth of the economy.

Actually, as you realise when you read the article by Jamie Hall and Andrew Stone in this quarter's Reserve Bank Bulletin, demographic change has always had a big effect on the growth in gross domestic product.

It's just that, because so far its effect on growth has been positive, we've been able to take it for granted. From about now, however, its effect is likely to be negative, so we'll be taking a lot more notice.

Leaving aside migration (as we will do in this article), the main factor that drives population growth is the fertility rate - the number of babies per woman. (The death rate also matters, obviously, but we'll also take rising longevity as read.)

The world's population has been growing rapidly for most of the past century, thanks to improvements in public health, medical science and economic development. But the global fertility rate has been falling sharply since the end of the postwar baby boom. From five babies per woman it's now down to about 2, thanks to the spread of effective contraception and rising living standards.

United Nations projections foresee the rate falling to two babies per woman by the middle of this century, which is lower than the replacement rate of 2.1 babies.

So the rate of growth in the world's population has been slowing for decades and, while population is expected to continue growing until the second half of this century, it will then start to decline.

Get that: some of our youngsters will live to see the world's population falling. But population decline will start earlier in some countries than others. Indeed, it's already started in Japan and Germany. And it won't be just the rich countries where population is falling.

The growth in a country's output of goods and services (GDP) can be viewed as coming from two sources: growth in the input of labour and improvement in the productivity of that labour. Three main factors determine the growth in the input of labour: growth in the population, growth in the proportion of the population that is of working age, and changes in the rate at which people of working age choose to participate in the labour force. (Again for simplicity we'll ignore changes in the participation rate.)

Over the 10 years to 2005 the United States' average growth in real GDP was 3.3 per cent a year. Turns out that 1.1 percentage points of that growth came from increased population (meaning it did nothing to raise America's standard of living) and 0.2 percentage points came from the rising proportion of the population that was of working age (here assumed to be those aged between 15 and 64).

But now Hall and Stone estimate that, over the 10 years to 2020, the average annual contribution to economic growth from population increase will be a smaller 0.9 percentage points, and the contribution from change in the working-age share will be minus 0.3 percentage points.

In other words, America's average rate of economic growth is expected to be 0.8 percentage points a year (or about a quarter) less, simply because of direct demographic change. The equivalent expected declines in the demographic contribution are 0.6 percentage points for Japan, 0.3 points for Germany and 0.2 points for Italy.

Why is America's loss likely to be greatest? Because demographic change is only now catching up with it. The others have already taken a fair bit of their medicine. It turns out that most of Japan's "lost decade" of weak economic growth is explained by its ageing and now declining population. Without that, its growth was much the same as Germany's.

So far we've tended to think of slow-growing or falling population as an issue purely for the developed countries. But Hall and Stone demonstrate that the coming decade will see demographic change making a reduced contribution to growth throughout Asia.

What's more, China's population will start to fall slowly in about 20 years' time and South Korea's population will peak in 10 year's time and then fall quite rapidly.

Looking again at the 10 years to 2005, China's economic growth averaged 8.8 per cent a year. Of this, 0.8 percentage points came from population increase and 0.6 percentage points from a higher working-age share.

Over the coming 10 years, however, Hall and Stone estimate that population's contribution to growth will slow to 0.6 points a year and the working-age share's contribution will be minus 0.3 per cent. So demography's contribution to growth will be 1.2 points a year lower than in the previous period.

Now take Korea. Demography contributed 0.7 percentage points to its average economic growth of 4.4 per cent a year in the first period, but will make a zero contribution over the coming decade.

The general story for east Asia (the five main ASEAN countries plus Korea, Taiwan and Hong Kong, but excluding China and Japan) is that demography's contribution of 1.8 percentage points (or almost half) during the 10 years to 2005 will fall to 1 percentage point in the coming decade.

But two Asian countries stand out from this general picture of demographic change making a significantly reduced contribution to economic growth over the next 10 years. Population growth in Indonesia and India will be slowing, but still relatively strong.

So the demographic contribution in Indonesia will slow only from 1.9 percentage points a year to 1.2 points a year. In India it will slow only from 2.2 points a year to 1.6 points.

Much of the demographic difference between China on one hand and India and Indonesia on the other would be explained by differences in population control policies, particularly China's one-child policy, which is about to really make its presence felt. (The main explanation for Korea, I suspect, is simply rising affluence prompting people to have fewer kids.)

But however it's explained, the likelihood is that, in about 2030, India will overtake China as the most populous country. So rest assured, economists will be saying a lot more about demography in coming years.

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