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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