The BCA rent seeks population growth

Economies evolve by bargaining over rents.  This occurs in the commercial sphere, where market power leads to price outcomes.  But where bargained outcomes are troublesome is in the political sphere – where vested interests ‘buy’ policy changes for their own benefit. No doubt, this second type of bargaining is part of the motivation of the Occupy Wall Street movement.

Today we read that the Business Council of Australia (BCA) president Graham Bradley is taking to the podium in Sydney today to start his bargain with policy makers – give us more rents by changing population policies.

In his television documentary on population growth, Dick Smith rightly pointed the finger to vested interests promoting population growth. He singled out the property development lobby as a key exponent of higher population growth, and that their obvious vested interests which do not align with the interests of most Australians.

While Bradley has just as much right as the next group to put forward the interests of his members, let’s not confuse the very valid point he makes about Australia’s falling productivity with his largely irrelevant and rent-seeking policy recommendations.

After reiterating the poor performance of Australian productivity growth, and the ageing population, Bradley notes today that:

Unless the slide is confronted through wide-ranging changes including tax reform and embracing population growth, Mr Bradley will say growth will be lower for the next 20 years and governments will be strapped for cash.

…lifting productivity requires an embrace of population growth and tapping private funds to deliver ”transport, logistics, energy and social infrastructure”.

Amid growing business pressure for changes to labour laws, Mr Bradley will call for a regime allowing employers and workers to ”strike adult agreements with each other to embrace technology, improve productivity and share the benefits”.

Mr Bradley also says:

But the Australian Bureau of Statistics measure of multi-factor productivity reports that our national productivity has been negative for the last six years – an unprecedented period of negative growth

While we know that population growth doesn’t reduce age dependency, suggesting that population growth will boost productivity is bizarre.  We know that productivity increases when you get more output for LESS input – not more output with more input.  The data also suggests there is an inverse relationship between the rate of population growth and the rate of improvement in productivity (shown in the chart below):

As many readers have pointed out, many countries with relatively stable populations are able to grow and improve standards of living quite successfully. Even Japan, with its negative population growth since 2005, makes Australia’s productivity performance look poor. Average annual Total Factor Productivity (TFP) growth since 2000 was a shy 0.4% (including a productivity recession in 2004-05) while Japan recorded a strong 1.2% over the same period (data from OECD here).

The relationship between population growth and low productivity growth has a solid theoretical basis.  While high productivity growth enables a high rate of population growth, meaning that these two variables are often seen historically to move together, the basic rationale for an inverse relationship is sound.  Let’s use a little thought experiment to demonstrate the point.

Imagine an island nation of 1000 people occupying 400 homes. The only production activity on the island is the making of nails from raw metals – an activity in which everyone participates. The metal is imported and the nails exported, and the income generated from the sale of nails is used to import all other goods required by the people. With present techniques each person can produce 500 nails per kilogram of raw metal per week (this is the baseline level of productivity – 500 nails output divided by 1 kilo plus 1 week of labour inputs).

The people of the island breed and accept immigration until the population reaches 1250. They begin to get cramped and decide they best build some more houses. 400 people spend a year of their time constructing the 100 new houses, and expanding the nail factory, before all 1250 people return to the nail trade.

After all this population growth and a massive investment in housing, equivalent to 20% of the existing stock (along with a massive investment in new factory space) each person can still only produce the same number of nails per unit of labour time and per unit of raw metal. There are no productivity gains from any of the investment unless the nail production techniques are changed to be more efficient.

In fact this growth has been costly. It took 400 people out of nail production for a year to build the new homes and extend the factory – a loss of 10 million nails (10,000 per original occupant or 5 months of work) that cannot be recovered.

If our island nation had instead invested in better production techniques such as automation, specialising the use of labour for particular parts of the process, or even invested the time to redesign the nails to be easier to manufacture with less material, they would have had productivity gains.

Clearly the vested interests represented by the BCA are in the business of housing and nail factory expansion.  Bradley is asking the government to ‘tap into’ his member’s private firms to deliver the infrastructure duplication required to accommodate an increased population.  But the public needs to be aware that this path is not in the best interests of the rest of the country.  It is simply an argument used by rent seekers to make their cause appealing to both politicians and voters.

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Comments

  1. Thank you for an article I can use to easily demostrate to others the counter arguement to immigration for ‘growth’ sake.

  2. Rumple,

    I have only just started to fully contemplate the implications of a non-growth economy. Reading seems pretty thin on the ground (go figure – non conventional wisdom and all). Are you able to look at it from an AUS point of view?

    I’m interested in the implications not only for our population, but also for our prosperity in a world where some very large nations are only just beginning their rise in prosperity.

  3. Yeah, same old shameless self-interest promotion by big business. No surprise here where we also see same self-interests promotion by the politician over the interests of the nation.

  4. Diogenes the Cynic

    +1. Higher rates of population growth are the last thing we need.

    Productivity in both the private sector and public sector is the key to improvements in quality of life and what I regard as an outmoded concept “economic growth”, but how many decision makers are listening?

  5. Increased immigration is like heroin addiction, you need a bigger hit each time to get the same level of high, ie 300k people on a population of 12million is a bigger percentage than on 23 million.

  6. What about the rate of reproduction in the rate of population growth? Immigration is only part of the equation the other part is Australians having babies. If the population needs to be contained then people must be prevented from having babies. If stopping people from having babies is a violence against human dignity and can’t be controlled by government then population growth is not in the government’s hands!

    I have two children and I hope to have more and I think this sort of discussion on the number of Australians there should be comes from people who think too abstractly or who think the government should determine everyone’s life!

    • We have a natural contraceptive – In order to fund their ponzi retirement scheme, Baby boomers have ensured that Gen X/Y have to take on a mega mortgage.
      .
      Presto – Double Income No Kids (DINKs), in order to service the mega mortgage for the next 30 years.
      .
      So to solve this problem, they have come up with yet another scheme – population ponzi by importing people (..like me :))

    • I’d suggest the capacity to increase your family’s size is constrained by your capacity to pay for them and your respective ages? Australians, by choice, are delaying having children, and having less of them for this reason. Natural population increase in most of the developed world, likewise, is shrinking.

    • Nick that is another (even more) polarising subject that no one is game to touch or maybe don’t really need to in this country – yet & hopefully never. & noone is stopping you from exercising your right to have more children. Maybe you don’t want to think about it – but your grandchildren May be Forced to think about it – the world & it’s resources ARE finite.

      A chicken farmer once told me he’d observed that when the coop is too full – the roosters control their population by turning to each other for their fun. He reckons most of the animal world behaves the same way? I can think of an exception – mindless locust plagues who breed up & consume everything in their path & eventually eat themselves (including each other) out of existence.

      Before we ended up at the top of the food chain there was a natural balance about things. Then we got an ‘edge’ & for good or bad – boy have we exploited it.

      I wonder what the population / square metre would have to be before humans just naturally stopped breeding? Or will we just consume ourselves out of existence like locusts.

    • Natural population increase is negative, even with the baby boomer echo (grandkids of baby boomers), and the baby bonus.

      So the rate of population growth is purely a product of policy decisions on immigration.

      • Agree with mav, and know of friends who have delayed having children, or had fewer, for that very reason. Can’t pay for it.

        Then there’s all the non-breeders like me knocking the average down as well.

    • go for it Nick !

      Just don’t expect grannies from both sides to do the free baby-sitting for the next 15 years.

      Toughen up to be able to say NO every ten minutes for unforseable years on end to your nearest and dearest ( children one two three and maybe even wife and self)

      Be ready to educate your own, almost entirely.

      Don’t become ill.

      Could think of more but have to go out to a volunteer meeting tonight to keep the local Eisteddfod going for 2012
      …………. loosing battle, I’m the youngest at 62….

  7. Very good explanation.

    I read his piece this morning and thought it was quite refreshing actually, without spotting the ulterior motive.

  8. ceteris paribus

    The BCA is all self-interest. Their framework is all economy and no society or environment. They are the pits.

  9. Great analogy! I’m just imagining extending it by sticking a copper mine in that island – the resource can’t be used for the main production, but would contribute to exports no less…

    (and thanks for more linking to sources of data!)

  10. How hard is it for the MSM journos (Clancy Yeates in this case) to keep their articles balanced by picking up the phone and speaking to the people like Dick Smith???
    .
    While the spruikers like Graham Bradley get complete coverage by the conflicted MSM, poor Dick Smith had to spend his own money to make a program and get it broadcast on TV.

  11. Good one Rumplesw

    So…suppose instead of the extra 250 people going to the nail factory, they open coffee shops, restaurants, become ‘personal trainers’ and oh we would now need a couple of policemen and some public servants…a few lawyers to really screw the system, etc
    So now we have the same export, but we need a whole lot of new imports…more food, materials, TV sets porches for the lawyers,so our population increase just means we have to borrow more from foreign people for us all to live.
    Hmmm sound familiar?

  12. I wonder if “Quarry Australia” board members are also on the “Ponzi Homes” board?

    Still the problem as I see it is how little traction with the general public this concept gets.

    Good stuff and thanks for publishing

  13. Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.
    — Kenneth E. Boulding, Economist.

  14. Nice work!

    The Big Australia boosters get a free run through most of the media outlets and they are very effective at running scare campaigns and generating factoid smoke machines.

    There are no compelling arguments for rapid population growth.

    Current inhabitants can breed as much as their budget allows – govt breeding bonuses and other subsidies should be removed. This will result in a declining population.

    A stable population could then be achieved by filling the short fall with a combination of:

    1. Non discriminatory skilled based migration.

    2. Family reunion

    3. Humanitarian – refugees.

    This would achieve a stable population and also a reasonable migration and humanitarian program.

    The catch is that the housing industry would be limited to restoring, improving and replacing the current stock.

    Imagine that!

    A stable population and a steadily improving standard of housing.

  15. Rumples … yes the BCA promote causes obviously to benefit the members that pay for them.
    BUT … it is possible to be pro-Australian and pro-growth, and this possibility is absent from your commentary or other posters to date.

    The post 1945 period with its “populate or perish” catch cry was ultimately a strategic judgement at Federal government level (ALP under Chifley if I recall correctly) that history tends to be harsh on sovereign countries with large geographic areas, especially resource rich areas, and small populations. And therefore the imperative is to increase one’s population to inhabit the landscape before someone does it for you.

    In Australia water resources are a key limiting factor, best measured in drought conditions. Even so, it is hard to argue that the place is overrun with people in aggregate, even if it does appear so in major centres, especially on urban fringes. For example, expanding population in the tropics has been an issue in government for many many years.

    The key difference from now to past times is the propensity of past generations to invest in infrastructure to make the future better than the present. In the 1950s and 60s there was a regular 2% Federal budgetary surplus of revenue over expenditures that was invested in capital works. The best we can currently do is aim for a surplus and encourage public/private partnerships for tollways.

    Consequently, there is a need to increase our current investment in infrastructure to support the population growth that we have before we go out and get more.

    • Looking at the graph here on Billyblog http://bilbo.economicoutlook.net/blog/?p=14195 , the federal budget was always in deficit from 53 to 72, and was normally in deficit before. In fact I’ll quote him:

      – “There is no notion over this period that the budget outcome was “balanced” over the business cycle. The historical reality is that the federal government is usually in deficit. If I had have assembled more historical data which is available in the individual budget papers going back to the 1930s then it would have just reinforced the reality that surpluses have been rare in our history independent of the monetary system operating (the old convertible system or today’s non-convertible system).” –

      I’d like to see the figures going back to 49, as I suspect Menzies never ran a surplus when in power, and it looks like the first surplus they ran came in their last year in power, or Labor’s first. Anyway, it looks like the postwar boom was built on steady Federal deficits.

  16. nice to see a population article without one side referring to the end of the world, environmental catastrophe or other dystopian fantasies of the mind..

  17. Prof Bartlett has presented this lecture some 1600 times since 1969.

    http://www.youtube.com/watch?v=F-QA2rkpBSY

    And has made two notable statements relating to sustainability:

    “The greatest shortcoming of the human race is our inability to understand the exponential function.”

    and his Great Challenge:

    “Can you think of any problem in any area of human endeavor on any scale, from microscopic to global, whose long-term solution is in any demonstrable way aided, assisted, or advanced by further increases in population, locally, nationally, or globally?”

    http://www.albartlett.org/