Gittins: High immigration masking economy’s weakness

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By Leith van Onselen

After spending 6-plus months on the sidelines, Ross Gittins cautiously re-entered the immigration debate over the weekend, noting that Australia’s turbo-charged immigration intake is “hiding the economy’s long-running weakness”:

Let me tell you about some comparisons of our performance by decade, calculated by independent economist Saul Eslake in a chapter he contributed to the book, The Wages Crisis in Australia.

In the first eight years of the present decade, consumer spending – which typically accounts for just under 60 per cent of gross domestic product – has been slower than in any decade in the past 60 years.

The major reason for this is that the present decade has seen household disposable income grow at an average real rate of just 2.2 per cent a year, which is less than in any of the previous five decades.

The biggest component of household income is income from wages. Its real growth in the present decade has been slower than in any of the five preceding decades…

Which brings us to the national accounts’ bottom line – growth in real GDP. It’s averaged 2.7 per cent a year so far in this decade, which is less than in any decade since the 1930s.

And get this. More than half the real GDP growth so far this decade is directly attributable to growth in the population. Growth in real GDP per person has averaged 1.1 per cent a year – equal to its performance during the 1930s, and slower that anything we’ve had in between.

Get it? Allow for population growth – so you’re focusing on whether economic growth is actually leaving us better off on average – and our weak growth since the financial crisis becomes even weaker.

If our economic performance seems better than the other advanced economies’, that’s just because our population is growing much faster than theirs.

…we too are locked into secular stagnation of a seriousness not seen since the 1930s. It’s just that our rapid population growth – plus the ups and downs of the resources boom – has hidden it from us.

Nothing we don’t already know, of course. As documented on MB ad nauseum, Australia’s decade average real GDP per capita growth is running at levels below the 1980s and early-1990s recessions:

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Growth in Aussie real household disposable income per capita this decade (0.61% per annum) is also tracking at a lower rate than the 1960s (2.28%), 1970s (1.84%), 1980s (0.91%), 1990s (1.31%), and 2000s (3.23%):

While Ross Gittins has stated the obvious about mass immigration masking the economy’s weakness, he refused to endorse cutting immigration. This is curious, given Gittins was previously one of the most vocal opponents of a ‘Big Australia’, but for some reason has been silenced.

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Here’s what Gittins wrote in early 2018:

There are at least four counts against the advocates of high immigration. First, their refusal to engage with the academic environmentalists arguing that we’ve exceeded the “carrying capacity” of our old and fragile land. Scientists? What would they know?

Second, they keep asserting high immigration’s great economic benefits, blithely ignoring the lack of evidence. Whenever the Productivity Commission has examined the issue carefully it’s found only small net effects, one way or the other. Its latest modelling found only a “negligible” overall impact.

Third, the advocates not only decline to admit the high social and economic costs that go with high rates of immigration, they decline to accept their share of the tab, doing all they can to shift it to the young, the poor and those on the geographic outer, including many of the migrants.

…The more we invest in such “capital widening” to stop the ratio of capital to labour declining, the less scope for investment in “capital deepening” to keep the ratio increasing, and so improving the productivity of our labour.

And before that:

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For a rigorous economic analysis it’s not good enough to simply assume that bigger is better. Why exactly is it better? The conventional answer is that bigger is better if it brings us a higher material standard of living – if it makes us more prosperous. But for this to happen – not necessarily for each individual, but on average, and for the community as a whole – the economy must grow faster than the population grows ie there must be an increase in real GDP per person.But there’s a third layer: even if increased population does lead to higher GDP per person, who shares in that increase? Conventional economics is about self-interest, so for immigration to be justified economically it has to be shown that the pre-existing population benefits from the decision to increase the population. If instead all the benefit went to the immigrants, then the immigration program would be merely an act of charity…

And before that:

The original bipartisanship was a kind of conspiracy. The nation’s business, economic and political elite has always believed in economic growth and, with it, population growth, meaning it has always believed in high immigration…

The most recent study by the Productivity Commission found an increase in skilled migration led to only a minor increase in income per person, far less than could be gained from measures to increase the productivity of the workforce.

What’s more, it found the gains actually went to the immigrants, leaving the original inhabitants a fraction worse off…

And before that:

The economic rationale for economic growth is that it raises our material standard of living. But this happens only if GDP grows faster than the population grows. So it doesn’t follow that slower GDP growth caused by slower population growth leaves us worse off materially.

That would be true only if slower population growth caused slower growth in GDP per person. I suspect many people unconsciously assume it does, but where’s the evidence?…

…But what’s strangest about the economic elite’s unthinking commitment to high immigration is the way they wring their hands over our weak productivity growth and all the “reform” we should be making to fix it, without it crossing their minds that the prime suspect is rapid population growth.

It’s simple: when you increase the population while leaving our stock of household, business and public capital unchanged, you “dilute” that capital. You have less capital per person, meaning you’ve automatically reduced the productivity of labour.

So you have to do a lot more investing in housing, business structures and equipment and all manner of public infrastructure – a lot more “capital widening” – just to stop labour productivity falling…

Lower immigration would help reduce a lot of our economic problems – not to mention our environmental problems (but who cares about them?).

And before that:

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And before that:

Bring back this Ross Gittins, who was brave enough to explicitly call-out the mass immigration ‘Big Australia’ con.

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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.