## Sunday, April 11, 2010

### Economic arguments against population growth

While Population Minister Tony Burke may be new to the debate, the population debate itself is certainly not new to politics. In 1994 the Commonwealth commissioned an inquiry (the Jones inquiry) into Australia’s population and carrying capacity, yet the inquiry failed to make firm recommendations. One of the inquiry’s authors then wrote a book in protest of the ‘government’s timidity’ and concluded that
... a sensible population policy for Australia would be to aim at stabilising the population within a generation or so and that this was quite feasible if net immigration of something below about 50 000 a year (say 100 000 migrants in gross terms) could be maintained. Population would then more-or-less stabilise somewhere between 19 and 23 million (depending on actual immigration) sometime before 2050.
Now, Tony Burke is faced with twin challenges of developing a policy position on population that keeps enough people happy to keep him in government.

We can easily run through some of the options available to Minister Burke – stimulate or dampen population growth. I suspect he would also like to encourage migration away from capital cities due to the ‘obvious housing shortage’, but as far as I can tell the Federal Government has little power to influence such regional migration (maybe an income tax relaxation depending on how remote your residence?)

To stimulate growth we could increase migration intake, and encourage higher birth rates – maybe $15,000 per child would do it? Or Burke could moderate population growth by reducing immigration quotas and discouraging high birth rates (by removing the baby bonus or even having a ‘child tax’). But which option is best for Australia? Are there strong economic arguments in favour of either higher or lower population growth? I would argue that on balance, economic principles strongly favour a declining rate of population growth (even a negative rate of population growth not a problem). For a start, we need to discredit some of the nonsense economics floating around. Bigger is not better. China and India both have plenty of people, while countries with the highest per capita incomes and standards of living generally have fewer people. China has greatly reduced population growth with its one child policy and seen vast economic growth – shouldn’t China have failed to grow because its population stabilised? The map above shows a pretty clear inverse relationship between population growth rates and standards of living. Nor is a comparison of population density meaningful in this debate, or we could argue that any region with a low population density is ‘underpopulated’ (like Antarctica or the Simpson desert) because we have compared the region to Hong Kong or the Netherlands. One core economic argument in favour of a greater population is that utility theory suggests that a trillion people living in poverty and slavery are better that one million happy and fulfilled people, leading lives directed by their own desires. It is known as the repugnant conclusion. I doubt anyone believes this is a good outcome, nor is claimed to be a good reason for greater population – it just happens to be at the heart of economic theory and can spawn unusual conclusions. A second argument appeals to economies of scale and suggests that with greater domestic consumption industries can expand to a point where they have economies of scale that make them internationally competitive. Why domestic population is currently a barrier to industry development is beyond me. If there are no artificial constraints on trade, shouldn’t the world be the marketplace of any industry even in its infancy? This argument only works if you couple high population with protectionism (the infant industry argument, which itself is often challenged). A third argument, that may be the focus of this debate, is that the demographic shift towards a flat population pyramid means that the proportion of people in the workforce will be much lower, and that public welfare support for the elderly will become a burden on a smaller workforce. However, one does not need to think too hard to realise that stimulating population growth simply delays this inevitable demographic shift. We have known this shift was coming for decades yet have failed to act. But it is not too late to implement solutions more practical than stimulation population growth. Another argument is that of national security. Unless we have enough people, we won’t be able to defend our borders. To truly defend Australia from all others, how many people would we really need? 150million? More? This is a ridiculous argument and a reason we have strong allegiances with countries with large defence capabilities. Apart from these arguments for high population growth over low growth or declining populations, Chris Joye cites the following reasons for a population minister, all of which have confusing and possibly contradictory implications 1. Australia’s long-term human capital requirements 2. The ramifications of those population projections for real GDP per capita and public finances; 3. The infrastructure that will be required to support the population base; 4. How that infrastructure will be funded by the public and private sectors; 5. The consequences of the population expectations for the nation’s housing needs; 6. Where we expect to locate this new housing (i.e. in which cities), and hence our long-term urban plans; and 7. The inextricable linkages between new housing supply and infrastructure investment, where the latter is a condition precedent to ‘enabling’ new shelter. My response would include such lines of questioning as: • Why would our human capital requirements ever be greater than our human capital? • Why would population change have ramifications on per capita measures of GDP? • Would not points 3), 4), 5), 6) and 7) suggest a slower rate of growth is preferable? My last challenge leads to the heart of the arguments against high rates of population growth. My (and many others) argument is that providing basic services for these new people diverts investment from new technologies that improve per capita productivity. Population growth inflated by policy wonks is a burden many of us would choose to live without. Like my argument that housing investment does not improve productivity, simply expanding the scale of capital infrastructure (such as roads, water supply, electricity supply etc) to match the scale of the population does not improve our per capita productivity. This investment diverts labour and resources away from actual productive capital investments such as new manufacturing technologies. A second economic argument against stimulating population growth is that a high fertility rate will keep women (and some men) out of the workforce for longer. If we are worried about the welfare burden on a smaller workforce, we should also be worried about so many parents out of the workforce, and the increased welfare burden from the children (their education and health costs). My final argument against high rates of population growth is that environmental impacts of new land developments are difficult to assess. The faster our rate of population growth, the lower we will be our standards of environmental controls. New mines, new housing, new industrial areas and ports will all have environmental impacts. To preserve environmental amenity for the current population, we should be careful about these impacts and adopt a cautious approach. And what of a declining population? Traditionally a population decline was the result of war or famine, but, as suggested here, that doesn’t mean population decline should always be in the disaster basket. But if the causes are benign, what about the consequences? If the decline in the number of people is slower than the natural growth in productivity (or output per person), then the economy will still grow. For example, a modest population decline of 0.25% a year would reduce Britain's economic growth rate of 2.25% to just 2% a year. That's hardly a recession. The number of consumers may decline, but the growth in incomes-and export markets-will ensure that demand stays buoyant. Nor will there be a demographic crisis, with huge numbers of old people overburdening those of working age. Population decline also leaves fewer children to support, train and educate for the first 20 economically unproductive years of their lives. The dependency ratio of workers to non-workers is virtually unaffected whether the population is growing 0.255 a year or falling 0.25%. Adjustments to an ageing society-discouraging early retirement, moving from pay-as-you-go to funded pensions-will be necessary in any case. A high rate of population growth, stimulated by policy wonks on the back of fallacious economic reasoning, is a social burden I am sure we can do without. #### 6 comments: 1. a negative population growth rate is a devilish thing to unleash on an economy - unfortunately I'm only reading this because I got back up to put something on my mp3 player and will have to save detailed comments for a later date. Q&A next week on channel 2 (Don't care if it's called ABC1, that's just what it is), is goign to be dedicated to this particular topic. As I say, I will return to this -S 2. First, as someone who is becoming a parent in 3 months, I'd like to comment on what a load of crap the baby bonus is. Seriously, if you decide not to have children because you are not going to get$5K from the federal government, then you probably shouldn't be having kids at that time anyway.

Second, I'm fairly neutral (undecided) on growth via immigration at the moment, except that, *if* the government is going to insist on controlling infrastructure development, and restricting land zoning (and land release), then it should put a cap on immigration. Alternatively (and this is my preference), it is time for the government to stop interfering with such matters as where people can build their house, and just let individuals sort it out themselves. Development in cities did just fine for a few thousand years without government support. Since governments really started meddling in the 70s, it has consistently gotten worse. How can anyone seriously suggest that government housing policies have been good these last 20 years? No single group can possibly know the location preferences of the entire country, so they should stop trying to work it out.

Cheers,
Tim

3. go back to the solow eqn to figure out the thing with this.

See http://www.cer.ethz.ch/resec/people/tsteger/AK_Models.pdf for a nice overview of how it all works

now remember that technological progress (A) is pretty bad in australia at the moment (http://www.theaustralian.com.au/business/opinion/what-canberra-needs-is-fewer-nerds-and-more-action/story-e6frg9if-1225852931365)

so if your population is zero or declining then decreasing marginal products will get you inevitably, because as that first link says: "the average product of capital falls
as the capital stock increases". I can't think of any point in earth's history where a government of any description has attempted to decrease the capital stock and the population in proportion in order to maintain living standards. That's just not how we work - we're no different to ants insofar as we have the biological urge to expand until nature stops us (which it occasionally does a bang-up job of)

Another thing I wanted to post here that was tangentially relevant was how some guy investigated a bunch of tin-pot african dictatorships. He viewed the governments as if they were businesses, and came to the conclusion that they were suffering from high fixed costs and needed to merge but had likely fatal differences in corporate culture. Bigger is better under certain circumstances.

-Stephen

4. All comes back to how you measure progress... If it is purely a quantifiable output measure such as GDP/growth then more = better, but if we're talking about a qualitative measure then I don't necessarily agree that more people is a prerequisite for better progress...

5. Stephen,

If negative population growth is such a devilish thing, why has Germany prospered so much in the past deaced with a negative rate of population growth?

6. Tony Burke is Big Australia bloke