Jessica Irvine went population ponzi mad over the weekend, quoting various “experts” warning of economic Armageddon if Australia halted its immigration intake. From The Canberra Times:
…what would actually happen if Australia halted its immigration intake?…
“One of the key drivers of growth in the Australian economy has been strong population growth,” explains HSBC Bank’s chief economist, Paul Bloxham.
Australia’s quarter century of uninterrupted growth is due in no small part to a swelling population…
Slower economic growth is less of a problem if what is produced has to be shared among fewer people. But migrants add to demand in the economy, helping to prop up spending and incomes, says Bloxham. “The net effect is still positive”…
On average, new migrants lower the age profile of the Australian population and are more likely to be of working age…
With no new migrants arriving, there would be fewer working aged people to pay the income taxes needed to support an ageing population…
At the margins, traffic congestion might not continue to deteriorate as quickly if immigration was halted. But there’s no reason to believe it would get better…
Similarly, there would be fewer potential buyers of property…
HSBC’s Bloxham says the belief that ending migration would solve all the growing pains of Australian cities is a misnomer: “We have to keep building infrastructure to keep pace with the growth in the population. The better approach here is to find a way to build good infrastructure rather than slow down our growth prospects by limiting population growth”…
Export revenue from international students is worth more than $20 billion a year…
The chief executive of the Tourism & Transport Forum Australia, Margy Osmond, says halting immigration would hurt the industry…
Angela Julian-Armitage is a barrister and national president of the Migration Institute of Australia, a body representing Australia’s migration lawyers and agents… Without immigration, she says: “The skilled occupation lists would never get filled. Seeing doctors and nurses would be harder for everyone…
So there you have it: lower growth, a budget blowout, skills shortages and jobs put at risk. Proponents of halting migration should be careful what they wish for.
Why the false binary choice of zero migration or rampant immigration, Jessica? How about moderate immigration – you know, the kind that existed throughout the post war period until John Howard opened the flood gates in 2004?
Between 1946 and 2003, Australia’s population grew by 213,000 per year, which was manageable. However, between 2004 and 2015, Australia’s population growth was ramped-up to an average of 343,000, due to increased immigration. Worse, the Intergenerational Report projects that Australia’s population will grow by an average of 394,000 people per year between 2016 and 2055, representing a further expansion in Australia’s immigration intake and nearly twice the post-war to 2003 level of population growth (see below chart).
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Why is such an expanded immigration program more desirable than the one that existed prior to John Howard opening the floodgates?
The arguments for ongoing high immigration, which come from the usual band of population boosters, also do not pass scrutiny.
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While it is true that population growth has boosted overall economic growth (more inputs equals more outputs), the data suggests that it has made individual living standards worse.
As shown in the next chart, GDP per capita has plummeted over the past 12 years as population growth has surged. In fact, the 10-year annualised rate of growth has plummeted to levels not seen since the early-1980s and early-1990s recessions:
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The next chart plots Australia’s per capita GDP growth over the 50 quarters since December 2003 (when Australia’s immigration intake was lifted dramatically) and compares it to the proceeding 50 quarters:
As shown above, Australia’s real GDP per capita has grown at less than half the pace since Australia’s immigration intake was lifted dramatically by John Howard.
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The situation is just as bad when one considers the growth in real national disposable income (NDI) per capita. According to the Australian Bureau of Statistics, NDI is “considered a good measure of progress for living standards because it is an indicator of Australians’ capacity to purchase goods and services for consumption”.
Again, the next chart plots Australia’s per capita NDI growth over the 50 quarters since December 2003 and compares it to the proceeding 50 quarters:
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As you can see, Australia’s living standards, as measured by NDI, have growth at roughly half the pace since Australia’s immigration intake was lifted dramatically.
What makes the above results even worse is that Australia has also enjoyed a lift in the terms-of-trade over the past 12 years, which has provided a tail-wind to NDI growth. To quote the Productivity Commission:
Growth in the population can increase the size of the economy but does not, in itself, increase output or income per capita. Growth of per capita income is determined by changes in participation (referred to as ‘labour utilisation’ in figure 2.2), labour productivity, the terms of trade and in net foreign income…
It is worth noting that in 2015 the terms of trade was still 26 per cent above the average level between 1960 and 2015.
The above data shows clearly that Australia’s expanded immigration intake over the past 12 years has not boosted material living standards for the average Australian. In fact, it has very likely had the opposite impact. And yet the Intergenerational Report has projected even higher migration over the next 40 years! What is the definition of insanity again?
Economic modelling from the Productivity Commission (PC) is equally alarming.
In 2006, the PC completed a major study on the Economic Impacts of Migration and Population Growth, which modeled the impact of a 50% increase in the level of skilled migration over the 20 years to 2024-25 and found that it caused real GDP to be 4.6% higher than would otherwise have been the case in 20 years time (more labour inputs equals more outputs).
The PC also found that real income per person would increase ever so slightly. That is, 20 years later real income per head would be 0.7%, or $380 a year, higher than would otherwise be the case.
However, “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“.
Hence, according to the PC in 2006, opening the spigots to skilled immigration would make the existing resident workers worse-off because they would earn less income than would otherwise be the case.
Last month, the PC released more modelling, which also found that maintaining positive net immigration would boost economic activity in per capita terms by increasing the proportion of the population participating in employment. Although this boost would be transitory:
Assuming that net overseas migration (NOM) continues at the long-term historical average rate (0.6 per cent of the population), by 2060 Australia’s population is projected to grow to nearly 40 million, with NOM adding some 13 million people to the population.
The continuation of an immigration system oriented towards younger working-age people can boost the proportion of the population in the workforce and, thereby, provide a ‘demographic dividend’ to the Australian economy. However, this demographic dividend comes with a larger population and over time permanent immigrants will themselves age and add to the proportion of the population aged over 65 years.
The Commission’s economy wide modelling projects that with NOM continuing at the long-term average rate with its current young age structure, by 2060:
– real gross domestic product (GDP) per person is projected to be some 7 per cent ($7000 in 2014 dollars) higher than if NOM was set to zero. In practice, this result cannot be extrapolated — limits on Australia’s absorptive capacity in terms of economic, social and environmental factors mean the modelling results do not shed light on the likely economic impact of very high rates of immigration
– a higher employment to population ratio associated with immigration will relieve some of the pressure of ageing on government expenditures (as a proportion of GDP), and moderate wage pressures particularly in high growth sectors…
However, labour productivity is forecast to decrease under current immigration settings, as are real wages, versus a zero NOM baseline:
Compared to the business-as-usual case, labour productivity is projected to be higher under the hypothetical zero NOM case — by around 2 per cent by 2060 (figure 10.5, panel b). The higher labour productivity is reflected in higher real wage receipts by the workforce in the zero NOM case.
Thus, the PC’s latest modelling showed a situation whereby ongoing high immigration improves per capita GDP by 2060 by boosting the proportion of workers in the economy, but this comes at the expense of lower labour productivity and lower real wages. Moreover, the benefits on workforce participation would only be transitory, with the migrants themselves aging and dragging on growth after the forecast period.
Most importantly, the PC explicitly cautioned that higher real GDP per person does not capture the negative externalities from immigration, such as worsening housing affordability, infrastructure bottlenecks, and environmental degradation. Nor does it account for any distributional impacts. Hence, policy needs to take a broader focus that improves “community wellbeing”:
While the modelling suggests that the Australian economy will benefit from migration in terms of higher GDP per person, whether migration delivers an overall benefit to the existing Australian community will also depend on other factors, including the distribution of those economic benefits, and the broader impacts of immigration, notably the associated social and environmental impacts…
High rates of immigration put upward pressure on land and housing prices in Australia’s largest cities. Upward pressures are exacerbated by the persistent failure of successive state, territory and local governments to implement sound urban planning and zoning policies…
Urban population growth puts pressure on many environment-related resources and services, such as clean water, air and waste disposal. Managing these pressures requires additional investment, which increases the unit cost of relevant services, such as water supply and waste management. These higher costs are shared by all utility users…
Immigration, as a major source of population growth in Australia, contributes to congestion in the major cities, raising the importance of sound planning and infrastructure investment. While a larger population offers opportunities for more efficient use of, and investment in, infrastructure, governments have not demonstrated a high degree of competence in infrastructure planning and investment. Funding will inevitably be borne by the Australian community either through user-pays fees or general taxation.
Hardly sounds like a slam dunk for mass immigration, does it? Quite the opposite in fact. If you want traffic congestion to get worse, to pay more for utilities and housing, and to see the environment get degraded, then continue with current mass immigration settings.
The Migration Institute of Australia’s argument that mass immigration is needed to fill skills shortages is also highly spurious.
First, analysis from the Department of Employment shows that Australia’s skills shortage “remains low by historical standards”.
Second, there are big question marks over whether immigration can alleviate skills shortages anyway?
That is, if Australia imports a whole bunch of workers to alleviate, say, shortages in construction, these workers will inevitably increase demand in other areas (e.g. for various services), thus creating shortages there. Australia could then import a whole bunch of workers to alleviate shortages in these areas, but then they will increase demand for housing and infrastructure, thus increasing shortages for construction workers. Dog meet tail.
The sustainable solution, of course, is to better utilise Australia’s existing workforce, where spare capacity is at high levels (see next chart).
Third, worries about Australia running out of workers due to an ageing population are misguided given the rise of robotics and artificial intelligence, which threatens to replace many of today’s jobs (see here).
The Migration Institute of Australia also could not have picked a worse example than doctors and nurses to make its point. Australia is already way oversupplied with medical staff, due primarily to widespread visa rorting, which has helped cause a blow-out in Medicare rebates. For this reason, the Health Department is now looking to remove 41 health roles from the official skills shortages list (see here for details).
Finally, complaints that cutting immigration would damage the education and tourism industries are disingenuous. Is Australia selling education/tourism or permanent residency? If it is the former, as it should be, then there is nothing to worry about. Further, why has Irvine only worried about the impact on exports and not the massive blow-out in imports as these new migrants huddle in Melbourne and Sydney, work in mostly unproductive (and non-tradable) services jobs, and buy a whole lot of imported items like flat screen TVs, cars and the like, thus blowing-out the trade deficit?
Moreover, Irvine has conducted classic “selective analysis”, only looking at the sectors that would be damaged by easing immigration not the sectors that would benefit. The obvious change ignored is that lower population growth takes pressure off house prices, interest rates and the currency. Thus the Australian dollar falls more quickly than otherwise helping cushion the post mining-boom adjustment as tradable sectors become more competitive more quickly, spreading the benefits much more widely than just the “citizenship export” sectors. Lower population growth also lifts productivity and income by decongesting cities and, over the long run, shares the depleting national endowment of resources over fewer people, also ensuring higher income per capita.
MB has for a long time called for a frank and honest national conversation about population policy, which focuses on raising the living standards of the existing population. Not the current ‘all growth is good’ position displayed by Irvine and her ‘Big Australia’ cronies, which blindly assumes that mass immigration is beneficial, and seeks to maintain current high immigration settings in the absence of community consultation and support. Irvine’s contribution is so one-sided that it brings to mind a much better piece she wrote several years ago about rent-seeking in the economy:
Australia is in the grip of a rent-seeking epidemic and the rent-seekers are winning. Sure, seeking special protection and privileges from government for one’s own industry is a long-standing tradition among Australian business. They used to seek tariffs on imported goods and other protectionist shelters. Today, they mostly seek ways to pay less tax.
The thing is, all government interventions in the economy create winners and losers. But often it is a small group of potential losers that have the self-interest and resources to mobilise against the changes, while the winners, for example the millions of consumers who benefit from lower import prices under trade liberalisation, are disparate and not as inclined to organise in favour of the change.
Rent-seeking destroys economic efficiency. Dollars invested in rent-seeking, through lobbying or advertising, represent a loss to the economy – focused, as they are, on shifting the distribution of existing profits, rather than creating more profit.
Every dollar spent on rent-seeking is a dollar less reinvested in expanding business or investing in new technology. So this new outbreak of rent-seeking not only duds taxpayers out of money, it threatens our future wages and living standards, too.
Yet her selective analysis of the population issue is a classic case in point, only referencing the narrow winners of high growth in the short term, including her employer Domainfax Media, while ignoring the losers, the rest of us, over the long term.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
