Big Australia RBA “laughable” on economic impacts

By Leith van Onselen

Yesterday, RBA Governor Phil Lowe gave a speech strongly supporting Australia’s mass immigration ‘Big Australia’ program, whereby Lowe spouted a bunch of benefits (most dubious) without considering the costs. You can read Lowe’s speech here along my initial response, which was scathing.

The pro-immigration mainstream media, such as SBS, has been quick to spruik Lowe’s comments in a bid to shut down dissenters.

Thankfully, The Australian’s Judith Sloan – who was the Commissioner in charge of the Productivity Commission’s (PC) 2006 review into the Economic Impacts of Migration and Population Growth and can be considered an expert on the matter – has torn Lowe’s arguments apart:

Let’s be clear, the governor of the Reserve Bank, Philip Lowe, is not an expert on the economics of immigration.

In fact, it is very obvious that he doesn’t even understand the core features of our migrant intake.

He’s a “big Australia” man. He can’t get enough of extra immigrants because this makes economic growth look good even though the real situation in per capita terms is much less flattering. While we may have had over a quarter of a century of unbroken economic growth, this is not true of per capita income. The speech he made yesterday should have acknowledged this point.

And as for his laughable proposition that high rates of immigration slow the rate of the ageing of the population, what he needed to mention is that this Ponzi scheme only continues if the rate of immigration continues to be ratcheted up.

It’s just too obvious — migrants themselves age. If he had bothered to consult a number of important reports put out by the Productivity Commission, he would have learnt that immigration is not an effective tool to stop the ageing of the population. We are better to let it happen and adjust…

Lowe also thinks that having more than half a million international students in the country is an unalloyed plus…

How naive can you get? Second-rate degrees from second-rate universities where a very large proportion of international graduates don’t even work in professional or managerial occupations — less than half the proportion of local graduates — do not add to the nation’s useful human capital. It’s simply a means of many students gaining permanent residence.

Lowe really needs to get out more.

He is happy to foist the cost and inconvenience of additional infrastructure on the incumbent members of the population to cater for the needs of new entrants. It would be better to avoid the need for all the new expensive infrastructure in the first place.

There is no doubt that there is a conspiracy among businesses, property developers, universities and governments to promote migrant intakes much higher than the members of the population would actually prefer. We can add the Reserve Bank to the list of agents that are in on the conspiracy.

Lowe would be best advised to stick to monetary policy when he gives speeches rather than express gratuitous opinions on contentious topics about which he knows very little.

Beautifully said.

Sadly, Sloan’s colleague at The Australian, and shill for a ‘Big Australia’ – Greg Sheridan – well and truly drunk Lowe’s Kool Aid and penned the following drivel:

Hooray! I now live in a nation of 25 million people. This is good news for Australia and good news for the world…

Our globe, and our nation, both benefit from more Australians. Fewer Australians would mean a poorer nation and a poorer world. And a much less secure Australia…

Tudge believes that not only the total size of our economy but the per-capita income of every Australian increases over time because of immigration.

He is right on this. The modelling which attempts to show little or no per-capita income gain is utterly ropey and routinely fails to take into account factors such as the huge amounts of capital that immigrants bring with them.

It is better to try to model backwards. Australia has grown when it has had immigration. We have been a high-immigration country all the way since World War 11 and we are vastly wealthier per capita than then.

Below are some ‘fact checks’ on Phil Lowe’s and Greg Sheridan’s claims about immigration being a boon for the Australian economy and living standards.

ECONOMIC IMPACTS ON EXISTING RESIDENTS

First, Lowe’s and Sheridan’s claim that immigration boosts the economy in per capita terms is misleading and largely debunked by the PC’s various modelling.

The PC’s Migrant Intake Australia report, released in September 2016, compared the impact on real GDP per capita from:

• Historical rates of immigration, whereby population hits 40 million by 2060; and
• Zero net overseas migration (NOM), whereby the population stabilises at 27 million by 2060.

The PC’s modelling did find that GDP per capita would be 7% ($7,000) higher by 2060 under current mass immigration settings. However, all of the gains are transitory and come from a temporary lift in the employment-to-population ratio, which will eventually reverse once the migrants age (i.e. after the forecast period):

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 PC also explicitly acknowledges that per capita GDP is a “weak” measure of economic welfare:

While the economywide modelling suggests that the Australian economy will benefit from immigration in terms of higher output per person, GDP per person is a weak measure of the overall wellbeing of the Australian community and does not capture how gains would be distributed among the community. Whether a particular rate of immigration will deliver an overall benefit to the existing Australian community will crucially depend on the distribution of the gains and the interrelated social and environmental impacts.

It is worth pointing out that the PC’s modelling unrealistically assumed that Australia’s infrastructure stock would keep pace with the extra population, which is vital if economy-wide productivity is not to diminish and for the PC’s GDP per capita forecasts to come to fruition:

Specifically, the expansion in labour supply through migration is projected to lead roughly to the same proportional growth in capital and output in most industries including infrastructure industries. That is, the modelling broadly assumes that there are constant returns to scale in production…

As the modelling broadly assumes that there are constant returns to scale in production, the economy-wide modelling results are broadly linear. Hence, while the modelling provides insight into the economic impact of NOM, in practice limits on Australia’s absorptive capacity (including environmental factors) mean that constant returns to scale are unlikely to hold for very high rates of immigration.

Clearly, this assumption is at odds with the Australian economy’s actual experience, whereby massive infrastructure deficits have accumulated over the last 15-years of hyper immigration, particularly in the major cities.

Most importantly for incumbent Australian workers, the PC’s 2016 modelling found that labour productivity and real wages are projected to decrease under current mass immigration settings versus zero net overseas migration (NOM):

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…

With zero NOM, real wages are projected to increase over time, and at a rate greater than in the business-as-usual scenario. That is, in the zero NOM scenario labour is relatively scarce which puts upwards pressure on real wages and causes a substitution towards capital, contributing to the marginally higher labour productivity relative to the business-as-usual scenario (figure 10.5, panel b). Higher rates of labour force participation through immigration in the business-as-usual case is projected to moderate such wage pressures.

Therefore, according to the PC’s most recent modelling, 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, beyond the forecast period (2060), the migrants will age and retire, thus dragging down future growth – classic ‘ponzi demography’.

As noted by the PC above, its latest modelling also did not take account of the distribution of gains to per capita GDP, which is vitally important. Thankfully, it’s 2006 major study on the Economic Impacts of Migration and Population Growth did, and the results were unflattering for existing residents.

Here, the PC modelled the impact of a 50% increase in the level of skilled migration over the 20 years to 2024-25 and found that “the incomes of existing resident workers grow more slowly than would otherwise be the case”. Below is 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…

Of course, the PC’s Migrant Intake Australia report also went to great lengths to stress that there are many costs associated with running a high immigration program that are not captured in the modelling but are borne by incumbent residents and unambiguously lowers their welfare. These include rising congestion, smaller and more expensive housing, environmental degradation, and more expensive infrastructure. For example, with respect to infrastructure, the PC noted:

…where assets are close to capacity, congestion imposes costs on all users. A larger population inevitably requires more investment in infrastructure, and who pays for this will depend on how this investment is funded (by users or by taxpayers). Physical constraints in major cities make the costs of expanding infrastructure more expensive, so even if a user-pays model is adopted, a higher population is very likely to impose a higher cost of living for people already residing in these major cities.

Accordingly, the PC explicitly asks that these costs be considered as part of any cost-benefit analysis on the immigration intake, rather than blindly following the results of its modelling, which is inherently limited and a poor measure of ‘wellbeing’.

MIGRATION IMPACTS NOT THAT SKILLED AFTER ALL

The claim that Australia’s migration program is ‘skilled’ and is lifting Australia’s human capital and productivity is flawed.

Recent research by Dr Bob Birrell from the Australian Population Research Institute, based on 2016 Census data, revealed that most recently arrived skilled migrants (i.e. arrived between 2011 and 2016) cannot find professional jobs, with only 24% of skilled migrants from Non-English-Speaking-Countries (who comprise 84% of the total skilled migrant intake) employed as professionals as of 2016, compared with 50% of skilled migrants from Main English-Speaking-Countries and 58% of the same aged Australian-born graduates:

This accords with a recent major survey from the Bankwest Curtin Economics Centre found that 53% of skilled migrants in Western Australia said they are working in lower skilled jobs than before they arrived, with underemployment also rife:

Therefore, Australia has effectively stolen ‘skilled’ workers from developing nations – where they are needed most – so they can work in lesser jobs in Australia!

These reports help to explain why the Australian Bureau of Statistics (ABS) latest Characteristics of Recent Migrants report, released in June, revealed that migrants have generally worse labour market outcomes than the Australian born population, with recent migrants and temporary residents having an unemployment rate of 7.4% versus 5.4% for the Australian born population, and lower labour force participation (69.8%) than the Australian born population (70.2%):

The PC’s recent Migrant Intake Australia report also stated that around half of the skilled steam includes the family members of skilled migrants, thereby around 70% of Australia’s total permanent migrant intake is not actually ‘skilled’:

…within the skill stream, about half of the visas granted were for ‘secondary applicants’ — partners (who may or may not be skilled) and dependent children… Therefore, while the skill stream has increased relative to the family stream, family immigrants from the skill and family stream still make up about 70 per cent of the Migration Programme (figure 2.8)…

Primary applicants tend to have a better fiscal outcome than secondary applicants — the current system does not consider the age or skills of secondary applicants as part of the criteria for granting permanent skill visas…

The PC also showed that while primary skilled migrants have marginally better labour market outcomes than the Australian born population in terms of median incomes, labour force participation, and unemployment rates, secondary skilled visas, and indeed all other forms of migrants, have worse outcomes:

IMMIGRATION CANNOT SOLVE AN AGEING ISSUE

Lowe’s claim that immigration can mitigate an ageing population has debunked many times by the PC for the simple reason that migrants 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”…
• PC (2016): “[Immigration] delays rather than eliminates population ageing. In the long term, underlying trends in life expectancy mean that permanent immigrants (as they age) will themselves add to the proportion of the population aged 65 and over”.

In a nutshell, trying to overcome an ageing population through higher immigration is a Ponzi scheme. It requires ever more immigration, with the associated negative impacts on economic and social infrastructure, congestion, housing affordability, and the environment.

BROADER IMPACTS NOT ACKNOWLEDGED

There is strong evidence to suggest that mass immigration is partly behind Australia’s trade and current account deficits, as well as the nation’s ballooning foreign debt.

The lion’s share of Australia’s export revenue comes from commodities and from Western Australia and Queensland in particular:

However, the majority of Australia’s imports and indeed private debt flows to our biggest states (and cities), New South Wales (Sydney) and Victoria (Melbourne). Sydney and Melbourne also happen to be the key magnets for migrants – a point acknowledged by the Grattan Institute.

Clearly, increasing the number of people via mass immigration does not materially boost Australia’s exports but does significantly increase imports (think flat screen TVs, imported cars, etc.). One only needs to look at both New South Wales and Victoria, which have driven huge trade deficits as the extra imports have far outweighed exports (Chart 15):

All of these extra imports must be paid for – either by accumulating foreign debt, or by selling-off the nation’s assets. Australia has been doing both.

Australia would improve its trade balance and current account deficit, as well as reduce the need to sell-off assets and binge on debt, if it simply reduced immigration.

Australia would still ship the same amount of hard commodities and agriculture regardless of how many people are coming in as all the productive capacity has been set up and it doesn’t require more labour. However, we would import far less.

Essentially, by running a mass immigration program, Australia is diluting its fixed mineral wealth among more people, which necessarily lowers residents’ welfare.

As Judith Sloan said, “Lowe would be best advised to stick to monetary policy when he gives speeches rather than express gratuitous opinions on contentious topics about which he knows very little”.

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