Bill Shorten hurls immigration Hail Mary

During last week’s break, I deliberately attempted to avoid the news in order to give myself a mental break. However, while sitting in a cafe reading about the Hawks AFL Grand Final victory, I came across the below article quoting the ALP Federal Leadership candidate, Bill Shorten’s, view that Australia’s immigration levels should rise from their already high level, which I found highly infuriating:

Australia should increase its immigration levels, Labor leadership hopeful Bill Shorten has declared, saying the next arrival could “be the next Albert Einstein or a good taxpayer”…

Speaking about immigration more broadly, Mr Shorten said Labor needed to re-state its support. Apart from Aboriginal and Torres Strait Islander people, everyone came to Australia by boat or plane, he said.

“I do believe the immigration levels can go up,” Mr Shorten said…

Immigration has been a plus for us and we should be certainly as a party being seen to be pro-immigration and pro increasing it, making sure people go to wherever it is sustainable for infrastructure and support, but we are an immigrant country and we shouldn’t ever hide from our destiny.”

Arguing that immigration levels should rise because one of those extra arrivals could become the next “Albert Einstein” is ridiculous. Someone arguing against immigration could equally argue that one of the extra arrivals could become a mass murderer or leader of a major crime syndicate.

Further, supporting an expansion of the immigration program just because Australia is an immigrant nation and it is “our destiny” is ludicrous. It’s not like Australia is currently running a tight immigration program – the level of immigration is already running at nearly twice the long-run average (see next chart)!

No, the key criteria that needs to be met in deciding what level of immigration is suitable for Australia is: “will it improve the living standards of the pre-existing population”? If the answer to this question is no, then policy makers should not proceed with expanding the immigration level, or preferably should curtail it to a level that provides net benefits to the pre-existing population.

Below is an examination of the key issues pertaining to Australia’s current high immigration intake, which suggests that it is not unambiguously good for the economy and living standards, as suggested by Shorten, and that the intake should in fact be cut back to more sustainable levels. Most of these arguments have been articulated previously, so apologies if you have read them before.

Population growth and the economy:

Advocates of population growth argue that it is required in order to grow the economy and that, without it, growth would suffer, lowering overall living standards.

However, from a narrow economic perspective, population growth (immigration) is good only if it raises the real incomes of the pre-existing population (e.g. GDP per capita). While it is true that Australia’s high population growth over the second half of the 2000s boosted Australia’s real GDP (more labour inputs, other things equal, means more outputs), evidence is sketchy as to whether GDP per capita increased due to population growth. In fact, as the below chart shows, real GDP per capita has remained lacklustre since 2007, suggesting that while the overall economic pie has increased in size because of high population growth, everyone’s share of that pie has barely grown.

Indeed, a big factor behind Australia’s world-beating economic performance since the GFC has been its strong population growth, which boosted headline GDP. Remove population growth from the equation, however, and you can see that Australia did in fact experience a recession in per capita GDP in 2008, with growth remaining lacklustre ever since (see next chart). Perhaps this is a reason why governments support strong immigration, since it inflates growth an enables them to claim that they are strong economic managers, even though individuals across the economy are experiencing minimal material improvement?

Of course, we don’t know the counter-factual. Growth in per capita GDP might have been worse (or better) without such strong immigration. But the arguments for (or against) high rates of immigration purely on narrow economic grounds is inconclusive.

We need immigration to ameliorate the affects of an ageing population:

Another common argument from proponents of high immigration is that it is required in order to mitigate the ageing of Australia’s population.

The United Nations forecasts that the ratio of workers to dependents in Australia is projected to fall significantly over coming decades as the Baby Boomer generation retires en masse (see next chart).

However, the argument that Australia can avoid (rather than delay) population ageing is spurious. The issue of an ageing population will need to be addressed at some point irrespective of the level of immigration. Simply importing more workers to cover the retirement of the Baby Boomers only delays the ageing problem, pushing the problem onto future generations. Further, what will be the solution in 30 years time when current migrants grow old, retire and need taxpayer support? More immigration and an even larger Australia?

While the current population growth rate of 1.8% seems fairly benign, due to the powers of compounding, such a rate of growth is clearly unsustainable over a long time frame (see next chart).

While the above chart may appear facetious, as population growth could be curtailed at some point in the future, the fact remains that there will always be vested interests pressuring governments to expand population growth in the face of an ever-ageing population. Hence, boosting immigration to overcome an ageing population is no solution at all.

Population growth, infrastructure and productivity:

A big negative of high rates of population growth is that it places increasing pressure on the pre-existing (already strained) stock of infrastructure and housing, reducing productivity and living standards unless costly new investments are made. Indeed, controversial investments like desalination plants would arguably not have been required absent population growth.

Further, when infrastructure and housing investment fails to keep up, it places upward pressure on inflation, requiring higher interest rates, which can then damage productive sectors of the economy. These dynamics were explained in detail in a 2011 speech by the Reserve Bank of Australia’s Phil Lowe (my emphasis):

Currently, housing-related costs – including rents, utilities and the cost of building new dwellings – account for around 20 per cent of the CPI, the largest share of any single group. Broadly speaking, the housing component of the CPI shows the same general pattern as that in underlying inflation, although the recent moderation is less pronounced (Graph 6).

A couple of factors are important in explaining this general pattern.

The first is that the large run-up in Australian house prices that was driven by the adjustment to low inflation ended in late 2003. When the housing boom came to an end, building cost inflation came down and growth in rents was subdued for a few years. These outcomes helped hold down overall inflation rates during this period. But by 2007, the cycle had again turned, with building costs rising more quickly and growth in rents accelerating. This faster growth in rents reflected the changing balance of demand and supply in the rental market, with strong population growth coinciding with relatively slow expansion of supply.

The second factor has been utilities prices. During the middle years of the 2000s utilities prices were increasing at an average rate of 4 per cent, which was slightly lower than that in the previous few years. Then from 2007, utilities price inflation accelerated sharply. The proximate cause was the regulatory decisions allowing double-digit price increases, partly to help fund infrastructure investment, particularly for the distribution of electricity. But a deeper cause was the low levels of investment in previous years, which meant that the capacity of the system to distribute electricity had not kept pace with the growth in demand, particularly during hot weather.

While these developments in rents and utilities do help explain the particular dynamics of inflation over the recent cycle, they also demonstrate that when the economy is operating up against supply constraints, all sorts of prices – and not just the price of labour – start rising more quickly.

A 2011 report by New Zealand’s Savings Working Group also supported the notion that high levels of immigration tends to put upward pressure on inflation and interest rates:

A country with a rapidly growing population needs to devote resources to building more roads, schools, shops, houses, factories and so on than a country with a low rate of population growth. In a country with a relatively low national savings rate, rapid population growth will put sustained upward pressure on real interest rates and, in turn, the real exchange rate, making it harder to achieve the per capita income gains that people (and the government) aspire to…

Further, given the tight constraints applied to the supply of land for housing, less immigration might also have left New Zealand less exposed to the damaging house price booms experienced in the 1990s and the last decade.

Population growth, natural resources and the environment:

Ongoing high population growth places additional strain on the natural environment, causing greater environmental degredation, increasing water scarcity and pollution, and making it more difficult for Australia to reduce its carbon footprint and meet international pollution reduction targets.

A related concern is that Australia earns its way in the world mainly by selling its fixed mineral resources (e.g. iron ore, coal, natural gas, and gold). More people means less resources per capita. A growing population also means that we must deplete our mineral resources faster, just to maintain a constant standard of living.

Conclusion:

Bill Shorten presumes that ongoing high population growth is beneficial to both the economy and living standards, and then ridiculously supports his stance by claiming that one of these immigrants could “be the next Albert Einstein” and that Australia is “an immigrant country”, therefore immigration levels should be increased.

However, were Shorten to objectively examine the facts, he would quickly discover that the case for a high level of immigration is anything but clear-cut and that the living standards of pre-existing Australians may actually be erroded.

As argued previously, while I believe that Australia could probably support a substantially larger population with improved policy settings and investment, like many Australians, I don’t hold much faith in our political class or policy making processes, which have time and again proven to be deficient in providing adequately for the pre-existing population (let also tens of millions more people), or that a substantially larger population would improve living standards anyway.

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