Immigration the cheap and nasty way to grow the economy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Why Morrison has changed his tune on immigration

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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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Does the economy depend on population growth?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Want better productivity? Cut population growth

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Beware gurus selling high migration

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Punters well aware of economic case against more immigration

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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A sustainable Australia?

Clancy Auditorium, UNSW
Thursday, November 4, 2010

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

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

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

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

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

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Summit consensus: everyone wins some, loses some

In the consensus spirit of dear departed Bob Hawke, Anthony Albanese is hoping it will be all sweetness and light at this week’s jobs and skills summit. And, to give them their due, the industrial parties have been doing their best, looking to realise John Howard’s maxim: “the things that unite us are greater than the things that divide us”.

The ACTU has issued a joint statement with the peak small business organisation expressing their agreement to “come together to explore ways to simplify and reduce complexity within the industrial relations system”.

The ACTU has also issued a joint statement with the Business Council – representing the nation’s biggest companies – and the two biggest employer groups. They all agree that federal and state governments should try harder and spend a lot more money fixing the almighty mess they’ve made of what they call “vocational education and training” but is actually what’s left of TAFE.

And the ACTU and the Business Council have issued a joint statement with the peak community welfare organisation, the Australian Council of Social Service, agreeing that the guiding framework of the summit should be “achieving and sustaining full employment”.

The Hawke government’s consensus summit succeeded because it sought a comprehensive, grand bargain in which each side gained something it wanted, while giving up things the others wanted.

Of course, no one knew more about hammering out a deal between warring parties than Hawke. I hope Albanese can rise to the occasion because, underneath all the smiling goodwill, the parties’ objectives in attending the summit seem diametrically opposed.

The main thing the unions want is a return to industry-wide, or at least multi-employer, wage bargaining because, under enterprise-level bargaining, they’ve lacked the industrial muscle to achieve decent pay rises. In contrast, the Business Council is desperate for a surge in migration to fill the present record number of job vacancies. Why? So big business doesn’t have to pay higher wages to attract the workers they need.

The council agrees that enterprise bargaining is broken, but what it means is that its members are finding it too hard to use the bargaining system to get their workers to agree to changes in the work they do in return for a pay rise.

Almost to a person, the nation’s economists are strong supporters of high levels of immigration. But the Economic Society of Australia’s recent survey of 50 top economists suggests their support has become more qualified.

Asked which of the policies likely to be discussed at the summit they considered to be of most benefit to Australians, only about a third picked “migration”, whereas almost two-thirds picked “education and skills”.

Independent economist Saul Eslake said he was “absolutely not an advocate of reducing our immigration intake” but he “didn’t think we should revert to being as reliant on it as a substitute for doing a better job of equipping those who are already here with the skills which will be required to obtain secure employment and decent wages in the years ahead”.

“Australia’s education system – at all levels – is increasingly failing to equip Australians with the skills required for the jobs of both today and the future,” he said. “As a result of the shortcomings in our education and training systems, we have become increasingly reliant on immigration to deliver skilled workers.”

Well, that’s one way to look at it. I think businesses have tolerated governments’ dismantling of higher education because, as part of their mania for lowering labour costs, they’ve found it easier and cheaper to import the already-trained labour they need.

Professor Sue Richardson, of Flinders University, said she thought that “judicious migration is very beneficial to the economic and social life of Australia”.

But we’ve “relied much too heavily on migration as a solution to any labour supply problem”. This “enables employers and our skills-development system to avoid a close examination of why we do not generate the skills that we need, and what needs to be done to ensure that we do”.

It seems the government is working towards increasing our immigration targets to please business and ease labour shortages, but in return for greater business support for technical training. And for higher wage rates for skilled workers on temporary visas, to limit the scope for undercutting the wages of local workers.

But Eslake suspects immigration may not return to pre-pandemic levels, at least not as quickly as widely assumed. I do too.

As for the wage-fixing arrangements, I think that’s what the ACTU will take away from the summit. Something has to be done to reduce the power imbalance between employers and employees, if the economy is to thrive.

It turns out enterprise bargaining suits big business, but not small business. The unions and the small business peak body have already agreed to explore a move to multi-employer bargaining.

With industry bargaining, firms don’t have to worry about agreeing to higher wages than their competitors are paying. You’d think that, in time, the nation’s big businesses would also see this advantage.

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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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Our aspirations for a Big Australia need a big trim

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Immigration is sharply slowing the ageing of our population

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Economics is about the behaviour of people! Who knew?

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I foresee a world where workers gain the upper hand

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Hard to hear angels above the racist heartbeat

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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