Another Fairfax journalist, Jacob Saulwick, has rushed to the defence of Australia’s population ponzi, choosing to completely misrepresent the Productivity Commission’s (PC) research on the issue to paint the picture that mass immigration is good for the economy and living standards.
Let’s dissect Saulwick’s key points:
The state government is spending record amounts of money on transport infrastructure, while a record amount of new homes are being built in Sydney. Neither development seems to be touching the sides of the city’s congestion woes, or reducing the pains of the housing market. Maybe there are just too many people around.
Absolutely. Sydney’s population grew by more than 800,000 people in the 12 years to 2016. And official state government projections have it growing by some 1,650 people a week (87,000 people per year) over the next 20 years – representing total population growth of 1.74 million people, which is the equivalent of 4.5 Canberra’s:
No wonder infrastructure and housing cannot keep up! Back to the article:
“The key thing in all this should be the evidence, and not just opinions,” says Glenn Whithers, professor of economics in the Crawford School at Australian National University in Canberra.
And on Whithers’ account – and on the account of many economists – one of the issues opponents of migration rates have to grapple with is that the evidence is that current levels contribute to the performance of the economy.
“We know it has a substantial economic expansionary affect,” says Whithers. “We would not have weathered the GFC as well as we did without a strong expansionary migration program.”
This is true in an aggregate sense: more people (inputs) equals more outputs (GDP). But what matters for living standards is everyone’s share of the economic pie. And on this account, the mass immigration experienced over the past 14 years has been a disaster. As shown in the next chart, 10-year annualised growth in real GDP per capita has slumped to the lowest level on record – even below the 1980s and 1990s recessions:
Moreover, once adjusted for population growth, Australia did in fact experience a recession during the GFC, only this was painted over by the massive immigration intake at the time, which inflated headline GDP:
What’s the point of running a mass immigration program – and making congestion and housing affordability worse, as well as damaging the environment – if everyone’s share of the economic pie is not increased?
Back to the article:
“What is very clear from the evidence is that they contribute more to the public purse than they take out from the public purse,” says Whithers. One of the reasons is that migrants tend to be younger than the population as a whole.
When Abbott was prime minister, his government commissioned a Productivity Commission inquiry into the issue. That inquiry did find that high migration rates put pressure on housing costs (which, of course, benefits existing home owners).
But the inquiry also found that maintaining the migration intake helped the economy overall, and, importantly, per person. If the rate of net overseas migration was cut to zero, the modelling said, the cost to the economy would be about $7000 a year per person.
“It’s a legitimate question to ask whether immigration does any more than simply adding to demand,” says the economist Saul Eslake. “And the answer according to these studies is that it does.” More of us have better paid jobs because of the country’s migration rate. Governments have more resources, in total, to cope with the pressures of population.
Did any of these economists actually read the Productivity Commission’s (PC) report, nor any of its earlier studies on immigration and the economy? Because the PC paints a totally different picture to the one above.
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 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“. Here’s the money quote:
The increase in labour supply causes the labour / capita ratio to rise and the terms of trade to fall. This generates a negative deviation in the average real wage. By 2025 the deviation in the real wage is –1.7 per cent…
Broadly, incumbent workers lose from the policy, while incumbent capital owners gain. At a 5 per cent discount rate, the net present value of per capita incumbent wage income losses over the period 2005 – 2025 is $1,775. The net present value of per capita incumbent capital income gains is $1,953 per capita…
Owners of capital in the sectors experiencing the largest output gains will, in general, experience the largest gains in capital income. Also, the distribution of capital income is quite concentrated: the capital owned by the wealthiest 10 per cent of the Australian population represents approximately 45 per cent of all household net wealth…
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. Hardly a ringing endorsement, is it?
The PC’s latest modelling, released last year, 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.
Prior work by the PC also found that any boost from immigration would only be temporary as migrants themselves also age:
- PC (2005): “Despite popular thinking to the contrary, immigration policy is also not a feasible countermeasure [to an ageing population]. It affects population numbers more than the age structure”.
- PC (2010): “Realistic changes in migration levels also make little difference to the age structure of the population in the future, with any effect being temporary“…
- PC (2011): “…substantial increases in the level of net overseas migration would have only modest effects on population ageing and the impacts would be temporary, since immigrants themselves age… It follows that, rather than seeking to mitigate the ageing of the population, policy should seek to influence the potential economic and other impacts”…
Most importantly, the PC’s latest research 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.
Back to the article:
Cutting the immigration program to reduce pressure on urban infrastructure like housing is the kind of simple solution that has complicated and negative ramifications. It would be better if governments faced up to the complicated solutions required to provide lasting responses to the issues facing places like Sydney.
Here, Lowe also had a suggestion. The “best” housing affordability policy, the governor of the Reserve Bank said, would be investment in urban transport infrastructure. This investment would increase access to cheaper land, and provide the amenity needed as cities become more dense.
The Abbott position is a cop-out. It would be absurd to undermine one of the best things about Australia because governments have failed to do their jobs well.
Just building more infrastructure to cope with the greater population is wishful thinking.
In already built-up cities like Sydney and Melbourne, which also happen to be the major magnets for new migrants, the cost of retrofitting new infrastructure to accommodate greater population densities can become prohibitively expensive because of the need for land buy-backs, tunnelling, as well as disruptions to existing infrastructure.
We have seen these diseconomies of scale time and time again. For example, projects like Melbourne’s now defunct East West Road Link was expected to cost 18 billion, whereas Sydney’s North West Rail Link would cost $8 billion. That’s an astounding $350 million to $1 billion per kilometre.
Hence, running a high immigration program becomes increasingly costly for existing residents. The huge infrastructure costs also force unpopular asset sales, increased debt borrowings and austerity – none of which is a desirable outcome.
In November 2013, the PC released its final report on An Ageing Australia: Preparing for the Future, which warned that total private and public investment requirements over the next 50 years are estimated to be more than 5 times the cumulative investment made over the last half century:
Australia’s population is projected to increase to more than 38 million by 2060… The likely population growth will place pressure on Australian cities… In response to the significant increase in the size of Australian cities, significant investment in transport and other infrastructure is likely to be required. This is true both within the cities themselves and for the links between regional and major cities. Policies will be needed to reduce congestion problems, and to ensure adequate infrastructure funding and investment efficiency…
Total private and public investment requirements over this 50 year period are estimated to be more than 5 times the cumulative investment made over the last half century, which reveals the importance of an efficient investment environment…
The report also warned that without such massive investment, multifactor productivity – the key driver of living standards – would fall:
With MFP growth projected to be 0.7 per cent per year under the base case, the remaining share of labour productivity is driven by the accumulation of capital. Given assumptions about the capital share of income, this study estimates that the capital/labour ratio would increase by around 1.8 per cent per year over the projection period, only slightly less than the long-run growth rate from 1974-75 to 2012-13 (figure 4.7).
The implied level of investment to drive such capital accumulation is large — estimated at around $38 trillion dollars over the projection period in constant 2011-12 prices (table 4.4). To put that in context, in the more than fifty years from 1959-60 to 2012-13, total investment in Australia has been around $8.2 trillion. While different assumptions about capital income shares, multifactor productivity growth and depreciation affect the projections, they all produce qualitatively similar outcomes: Australia will be buying and building a large amount of physical capital. Without the efficient allocation of that capital, the achievable labour productivity growth rate would be considerably lower.
The bottom line is that running a high immigration program requires massive investment and costs a lot. Australia’s governments have failed dismally on this front, preferring to take the sugar hit from added demand while leaving the problems to be solved down the track on somebody else’s watch (i.e. never). Yet Saulwick magically believes that the situation can be turned around and that Australia can easily accommodate the flood of new residents without straining infrastructure, the environment, or living standards.
Saulwick argues that those arguing for a immigration cut are either racists, political opportunists or greenies and that economic “evidence” comes down against all three. You can’t make that claim unless you look at the evidence, Jacob, which you have self-evidently NOT done.