Debunking the population boosters

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By Leith van Onselen

Over the weekend, Fairfax’s Matthew Kidman published an article arguing that Australia needs to continue high rates of immigration into perpetuity in order to boost growth and living standards. Below are the key extracts [my emphasis]:

With interest rates and the local currency lower, Australia will travel back to a more balanced economy [from mining-led growth]…

To take advantage of these changes, we must have policies that accommodate domestic growth, generated by the local economy and not by exports. The key industries are housing, retail, education, manufacturing and tourism. All these sectors require better infrastructure, more competition, less regulation and, dare I say, a population policy that results in more people around the globe wanting to come and live in Australia.

While increasing the local population is not always an easy subject for many to comprehend it is a proven way to boost economic growth. If we slowed population growth, we would quickly slump into the sort of funk currently being experienced by other developed economic zones such as Japan and Europe…

The best and most sustainable global growth story over the past 150 years has been the US, where the population has gone from slightly over 17 million in 1840 to approximately 314 million today. The US has taken people from all over the globe and become an economic powerhouse unmatched by anyone. In the short term the country is suffering from debt issues, but in the long run this will be seen as temporary. Australia has followed a similar path with the population increasing sixfold in the past 113 years. If we went through a similar growth phase over the next 113 years, the number of people living in Australia would be about 140 million. No doubt many of those people would be coming out of Asia.

The key is that we are now entering a new economic phase. The period of booming exports is rapidly drawing to a close and we must have policies in place to generate growth and maintain our standard of living. To achieve this we need a different mindset.

The issue of whether never ending high rates of population growth, and immigration in particular, are desirable from an economic, environmental, and social perspective is confounding for most people, but relatively straight forward when analysed in a systematic and unbiased manner.

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Below are my thoughts on whether continued high population growth (based primarily on immigration) is desirable for Australia. Some of these arguments have been articulated previously, so apologies if you have read them before.

Population growth and the economy:

Kidman makes the heroic claim that endless population growth 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 remained relatively stagnant.

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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 appears inconclusive.

Population growth, infrastructure and productivity:

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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 be 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:

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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.

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Does anyone seriously contend that Australian living standards and the natural environment wouldn’t be harmed substantially in the event that Australia’s population hit 140 million, as advocated by Kidman?

As argued last time, Australia could probably support a substantially larger population with improved policy settings and investment. However, like many other 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.

Population boosters like Matthew Kidman need to put forward a better argued case if they are to convince Australians to willfully accept a “Big Australia”. Simply suggesting that population growth is desirable because it boosts the overall economy (whilst ignoring per capita GDP), whilst playing down any adverse impacts on livability and the environment, is not going to cut it.

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About the author
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.