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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Little Aussie battler battles on to future glory

Have you noticed how people are getting more upbeat about the economy? It's no bad thing. And, on the face of it, the figures we got this week confirmed their growing confidence.

The Australian Bureau of Statistics' national accounts showed that real gross domestic product grew by a very healthy 0.8 per cent in the June quarter. That's equivalent to annualised growth of 3.6 per cent.

But GDP growth is far too volatile from quarter to quarter for such calculations to make much sense (even though it's what the Americans do). And, just to ensure we don't get too confident, we have a media skilled in finding the lead lining to every silver cloud.

They lost no time in pointing out that half that growth came from increased consumer spending during the quarter of 0.7 per cent. But this return to strong growth was unlikely to be sustained because weak growth in wages meant much of the spending was covered not by an increase in household income, but by a decline households' rate of saving.

The household saving rate had fallen from 5.3 per cent of household disposable income to 4.6 per cent. Indeed, this was the fifth successive quarterly fall from a rate of 7 per cent in March 2016.

It's undeniable that we won't get back to truly healthy economic growth until we see a return to wages growing in real terms. And it's hard to know how long this will take.

Without doubt, weak wage growth is the biggest cloud on our economic horizon.

But the story on the decline in our rate of saving isn't as dire as the figures imply. Saving is calculated as a residual (household income minus consumer spending), meaning any mismeasurement of either income or spending - or both - means the estimate of saving is wrong, and likely to be revised as more accurate figures come to hand.

This time three months ago, for instance, we were told that for consumer spending to grow by 0.5 per cent in the March quarter, it was necessary for the saving rate to fall from 5.1 per cent to 4.7 per cent.

Huh? Obviously, the March-quarter saving rate has since been revised up 0.6 percentage points. How? By the bureau finding more household income. (The saving rate was revised up by lesser amounts in each of the previous six quarters.)

And it won't be surprising to see it happen again. We know that, according to the wage price index, average hourly rates of pay rose by 1.9 per cent over the year to June, whereas this week's national accounts tell us average earnings per hour fell by 0.8 per cent.

It's quite possible for the national accounts measure to show less growth than the wage index if employment is growing in low-paid jobs but declining in high-paid jobs, but it's hard to believe such a "change in composition" would be sufficient to explain so wide a disparity.

Moral: don't drop your bundle just yet.

A second line of negativity we've heard this week says much of the rest of the June quarter's growth came only from increased spending by governments, with government consumption contributing 0.2 percentage points and capital spending contributing 0.6 points.

Two points. First, increased spending on public infrastructure is no bad thing and, indeed, is exactly the budgetary support for stimulatory monetary policy (low interest rates) the Reserve Bank has long been calling for.

Second, the transfer of the new, private sector-built Royal Adelaide Hospital to the South Australian government during the quarter had the effect of overstating public investment for the quarter and understating business investment.

Looking at the adjusted figures for business investment, we find the good news that non-mining investment spending grew by (an upwardly revised) 2.1 per cent in the March quarter and 2.3 per cent in the latest quarter, to be up 6.1 per cent over the year to June.

That says the long-awaited recovery of business investment in the non-mining economy (the other 92 per cent) is well under way. It's also good to know that the long, growth-reducing decline in mining investment isn't far from ending.

Growth in home-building activity was negligible during the June quarter, although Treasurer Scott Morrison says there's a "solid pipeline of dwelling construction" remaining.

The volume of exports of goods and services rose by 2.7 per cent during the quarter, offset by a rise of 1.2 per cent in the volume of imports, implying a net contribution to growth of 0.3 percentage points in the quarter.

However, this was more than countered by a negative contribution of 0.6 percentage points from a fall in inventories, mainly a rundown of the grain stockpile. (That is, grain produced in an earlier quarter was exported in the latest quarter.)

Rural export volumes rose by 18.7 per cent over the year to June. Exports of services were also strong, having averaged annual growth of more than 7 per cent over the past three years, driven by exports of education and tourism.

So, overall, economic growth in the June quarter was a mixed picture which, following a contraction of 0.4 per cent in September quarter last year and - also weather-related - weak growth of 0.3 per cent in March quarter this year, amounted to growth of just 1.8 per cent over the year to June.

This is artificially low, but the September quarter should see us bounce up to artificially high annual growth of about 3 per cent, as last September quarter's minus 0.4 per cent drops out of the calculation.

If you want more persuasive support for our more optimistic mood, however, don't forget employment grew by a super-strong 214,000 in just the first seven months of this year – with 93 per cent of those jobs full-time – and leading indicators showing more jobs strength to come, plus surveys of business conditions showing them at their best in almost a decade.

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