Will Dick Smith’s Fair Go “stuff the whole economy”?

Advertisement

By Leith van Onselen

As expected, several “experts’ have lashed Dick Smith’s call to cut immigration, arguing that it would trash the economy. From The Australian:

Economists and senior business figures have disputed Dick Smith’s claims that immigration is fuelling inequality and questioned his Grim Reaper campaign to save the nation from its “addiction to endless growth”…

The millionaire’s plan for tackling inequality would see the ­annual immigration intake cut from 200,000 to 70,000. His campaign also targets Australia’s wealthiest people, with a call for an inheritance tax, and total transparency in tax returns…

But retail billionaire Gerry Harvey said Mr Smith’s economics didn’t add up. Asked if governments should follow Mr Smith’s suggestion and increase company tax to its 1970s rate of 45 per cent, Mr Harvey said: “That’s a wonderful idea in theory, Dick, but you’ll stuff the whole economy”…

Melbourne University professor of demography Peter McDonald said Mr Smith’s evidence “wasn’t very sound”.

“The demography is quite amateurish, I have to say. There’s no evidence that migrants are taking Australians’ jobs. The problem is skill levels. For a long time, Dick Smith has been anti-migration and this manifesto rolls up that viewpoint with a lot of mismatched economic information.”

Migration Council Australia chief executive Carla Wilshire called on Mr Smith to explain his numbers. “Our modelling, completed in 2015, shows that ­migration reduces inequality and increases Australia’s long-term economic performance and competitiveness,” she said.

Commonwealth Bank senior economist Gareth Aird said a ­reduction in Australia’s population growth rate would alleviate pressure on house prices and wage growth, but a greater emphasis needed to be placed on living standards.

Mr Smith denied claims he was anti-immigration but said the current rate was too high. He did, however, want Australia to ­increase its humanitarian intake.

The assertion that mass immigration increases inequality is pretty easy to explain.

First and most importantly, mass immigration raises the cost of living for ordinary workers. Think higher housing prices and rents in Sydney and Melbourne, as well as increased travel costs (especially for workers in the outer-suburbs). By contrast, land holders and the owners of capital benefit from mass immigration via rising land values as well as more consumers and profits. Meanwhile, the costs of building infrastructure, etc, to support a growing population are borne by the broader community. In effect, the gains from mass immigration are privatised by the wealthy, whereas the costs of population growth are socialised on everybody else.

Advertisement

Second, and related to the above, mass immigration reduces the earnings of incumbent workers, while increasing the incomes of wealthy owners of capital. The Productivity Commission’s (PC) major study on the Economic Impacts of Migration and Population Growth, completed in 2006, explained these dynamics well. Specifically, it modelled the impact of a 50% increase in the level of skilled migration over the 20 years to 2024-25 and found:

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…

Peter McDonald’s claim that Dick Smith’s “demography is quite amateurish” is funny. McDonald co-authored a 1999 federal parliamentary research paper, entitled “Population Futures for Australia: the Policy Alternatives”, whereby he explicitly noted that it is “demographic nonsense to believe that immigration can help to keep our population young”, while also recommending “a population of 24-25 million within 50 years” as well as “annual net migration… in the order of 80 000“. So he broadly supported Dick Smith’s current view but has since flip-flopped for no apparent reason. It’s not like the demography arguments have changed since 1999. But Peter McDonald sure has!

Advertisement

As for the Migration Council’s modelling, why should we trust it? All economic modelling is highly dependent on the assumptions used, and the Migration Council is a well-known vested interest in favour of mass immigration. The same can be said for billionaire retailer Gerry Harvey, who is a key beneficiary of lower tax rates on the rich and mass immigration to support volume growth at his business. Both are using classic “partial analysis” do defend their own patch against any “whole economy” view. What will happen if immigration is cut is growth drivers will swing away from the housing/debt complex and towards tradables as interest rates and the dollar fall plus productivity improves.

In any event, the PC’s various studies/modelling on immigration have shown minimal material economic benefit for ordinary workers, but large external costs when things like traffic congestion, reduced housing affordability, and environmental degradation are taken into account.

Ultimately, the arguments around mass immigration relate mostly to living standards. In particular, with Australia adding a Canberra-worth of population every year, how will the governments ensure that infrastructure keeps up:

Advertisement

Where will things like the 61 primary schools, 2 public hospitals and 25 residential aged care facilities required to keep up with population growth come from and who will pay?

Nowhere is the answer. And amenity will fall materially as a result. The experience this century tells us all we need to know. Australia has added an insane 5.5 million (+29%) people so far this century without anywhere near the infrastructure to match. With shortages today in houses, health, education, transport and looming in water plus blowing our Paris climate change remediation commitments. Current construction is already crush-loaded before it is completed.

Advertisement

And there’s no plan to ensure that the situation does not deteriorate as Australia’s population marches blindly to 40 million mid-century.

To put it bluntly, if left unchecked, it is mass immigration that will “stuff the whole economy” and Dick Smith’s Fair Go is a good way to prevent it.

[email protected]

Advertisement
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.