The Economist magazine has published an article on the Australian economy entitled The next Golden State, which argues that with a bit of self-belief and the right policies, Australia could become the next California. Here’s an extract:
IMAGINE a country of about 25m people, democratic, tolerant, welcoming to immigrants, socially harmonious, politically stable and economically successful; good beaches too. It sounds like California 30 years ago, but it is not: it is Australia today. Yet Australia could become a sort of California—and perhaps a still more successful version of the Golden State…
Australians must now decide what sort of country they want their children to live in. They can enjoy their prosperity, squander what they do not consume and wait to see what the future brings; or they can actively set about creating the sort of society that other nations envy and want to emulate. California, for many people still the state of the future, may hold some lessons. Its history also includes a gold rush, an energy boom and the development of a thriving farm sector. It went on to reap the economic benefits of an excellent higher-education system and the knowledge industries this spawned. If Australia is to fulfil its promise, it too will have to unlock the full potential of its citizens’ brain power…
Australia cannot, of course, do exactly what California did… But it could do more to develop the sort of open, dynamic and creative society that California has epitomised, drawing waves of energetic immigrants not just from other parts of America but from all over the world…
What then is needed to get the alchemy going? Though government should not seek to direct the chemistry, it should create the conditions for it. That means ensuring that the economy remains open, flexible and resilient, capable, in other words, of getting through harder times when the boom is over (a sovereign-wealth fund would help). It means maintaining a high rate of immigration (which started to fall two years ago). It means, above all, fostering a sense of self-confidence among the people at large to bring about the mix of civic pride, philanthropy and financial investment that so often underpins the success of places like California…
Its current political leaders, with notable exceptions, are perhaps the least impressive feature of today’s Australia. Just when their country has the chance to become influential in the world, they appear introverted and unable to see the big picture. Little legislation of consequence has been passed since 2003. A labour-market reform introduced by the Liberals was partly repealed by Labor. A proposed tax on the mining companies was badly mishandled (also by Labor), leading to a much feebler one. All attempts at a climate-change bill have failed… Instead of pointing to the great benefits of immigration—population growth is responsible for about two-fifths of the increase in real GDP in the past 40 years—the two parties pander shamelessly to xenophobic fears about asylum-seekers washing up in boats..
Better themes for politicians would be their plans to develop first-class universities, nourish the arts, promote urban design and stimulate new industries in anything from alternative energy to desalinating water…
Aussies need a bit more self-belief. After that perhaps will come the zest and confidence of an Antipodean California.
Does anyone else find The Economist’s article irritating?
First, consider the article’s claims about population growth and immigration [my emphasis]:
What then is needed to get the alchemy going?… It means maintaining a high rate of immigration (which started to fall two years ago)… population growth is responsible for about two-fifths of the increase in real GDP in the past 40 years.
The article has employed the well-trodden argument that population growth is desirable because it increases Australia’s real GDP. This argument is true on a superficial level – more people, other things equal, does mean higher consumer spending, greater demand for housing and infrastructure, resulting in higher construction, more jobs and a greater number of transactions.
However, from a narrow (materialistic) economic perspective, it’s not real GDP that improves living standards, but real GDP per capita. And if you look at what’s actually happened to real GDP per capita over the years, then Australia’s economic performance is less spectacular.
Take the below chart, which plots Australia’s real GDP against real GDP per capita since 1980:
As you can see, real GDP has grown at a much faster rate than GDP per capita. The difference in growth rates is due to Australia’s high population growth. What’s disconcerting for Australia is that GDP per capita has essentially flat-lined since 2007 at a time when real GDP has continued its upward march. This divergence is, once again, due to Australia’s high rate of immigration and population growth over this period.
Now consider the same data plotted as a rolling annual growth rate:
As you can see, Australia’s economic performance during the Global Financial Crisis, whilst undoubtedly better than most other developed nations, was sugar-coated by Australia’s high rate of immigration. When real GDP per capita is assessed instead of real GDP, you will notice that Australia’s growth rate did, in fact, turn sharply negative in 2009, casting doubt on the Government’s claim that Australia avoided the global recession. Moreover, note the consistent downward trend since the 1990s.
The purpose of this discussion is not to attack immigration or population growth – I will address these issues separately in a future post. Rather, it is to question the Economist’s argument that immigration and population growth are unambiguously beneficial to the Australian economy. While it is probably true that immigration has accounted for two-thirds of Australia’s real GDP growth over the past 40 years, the important question is: what has been the impact on real GDP per capita?
Put another way, what’s the point of inflating Australia’s GDP pie through population growth if everybody’s share of that pie grows at a slowing rate or actually falls?
Another irritating aspect of The Economist’s article is that it seems to worship California as some kind of economic beacon that Australia should aspire to. Nothing could be further from the truth. California is a basket case. To illustrate why, consider the following facts.
First, according to the Federal Reserve, California’s unemployment rate (currently 12.0%) is well above the US average (currently 8.8%):
Second, California has topped Forbes’ latest Most Miserable Cities rankings, with eight Californian cities making the top twenty and four cities making the top five:
California has never looked less golden, with eight of its cities making the top 20 on our annual list…
The Governator [Arnold Schwarzenegger] exited office last month with the state facing a crippling checklist of problems including massive budget deficits, high unemployment, plunging home prices, rampant crime and sky-high taxes…
California’s troubles helped it land eight of the 20 spots on our annual list of America’s Most Miserable Cities, with Stockton ranking first for the second time in three years…
California cities take the next three spots: Merced (No. 3), Modesto (No. 4) and Sacramento (No. 5). Each has struggled with declining home prices, high unemployment and high crime rates, in addition to the problems all Californians face, like high sales and income taxes and service cuts to help close massive budget shortfalls…
The Golden State has never looked less golden. “If I even mention California, they throw me out of the office,” says Ron Pollina, president of site selection firm Pollina Corporate Real Estate. “Every company hates California.”
Third, because of California’s severe constraints on housing supply (both physical and regulatory), its housing market remains the second most unaffordable in the USA, behind Hawaii:
This is despite California experiencing a monster housing crash following a massive run-up in prices:
Finally, Californian Government finances are a mess. California is facing budget shortfalls in excess of $20 billion each year for the next five years, and acquires $25 million in new debt each day (see below chart).
The problem is one of spending but also of stagnant revenues. Pension costs are ballooning in the state thanks to decades of unchecked growth and Cadillac service for many retirees. When things are good, many deals were cut so you have people retiring at 50 or 55 with incredible pensions. No tiny stock portfolio can compete yet it is now clear that the taxpayer is on the hook for these if nothing is reformed. Given the anger from working and middle class Americans, it is unlikely that many will be happy about people receiving six-figure pensions while they are trying to find work. Just like the nation, you can’t cut taxes and expect to increase services. This kind of magical thinking is what got us into this mess. The Pied Piper must now be paid.
Again, the purpose of this discussion is not to attack California. Rather, it is to highlight the folly in The Economist holding-up California as some kind of model economy that Australia should seek to emulate.
Surely The Economist could have found a more worthy example.