Thursday, August 12, 2010

Last piece of the population puzzle

I was pleasantly surprised by Dick Smith’s Population Puzzle documentary last night. He covered most of the key economic arguments against growth, including a rebuttal of the skills shortage and age dependency arguments. I was not taken by the food security argument, but was impressed by the way he highlighted the clash over land use on the urban fringes (where some of the most fertile soils are found).
Most importantly Dick raised the issue of vested interests promoting population growth early in his piece. He rightly singled out the property development lobby as a key exponent of higher population growth, and their obvious vested interests which do not align with the interests of most Australians.

Page 58 of today’s Financial Review has run a pro-population growth response to the Dick Smith documentary, advocating population growth on the grounds of economies of scale – an argument that is easily debunked.

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.

Economies of scale from increasing the size of the market only apply to monopolies in any case, and even then it is hard to know whether futher efficiency gains are possible (and whether they would be passed on to consumers).

But the confusion of the pro-population growth position is revealed later in the article when it states:

Of course it is possible to have economic growth without population growth – by setting up the conditions for higher productivity growth.

But the ‘meeting the challenges of growth’ argument persists in the end. We are apparently better off investing in massive duplication of infrastructure (roads, housing, energy and water) to accommodate higher population growth, which decreases productivity and economic growth, rather than focus on improving the productivity of the existing population - an absurd conclusion.

I have explained in detail in a previous post how housing investment and other infrastructure duplication does not improve productivity – it is a short term cost that simply allows more people to be equally as productive as the current population at some time in the future. Slower population growth is the recipe for improved per capita well being.

The relationship between growth and productivity is interlinked, but not in the way pro-population growth advocates maintain. Higher population growth is strongly negatively correlated with improved productivity. The graph below uses the ABS multifactor productivity measure and percentage change in population growth to demonstrate. Productivity improved most dramatically when population growth was around 1%.

The investment duplication argument is the final piece to the population puzzle.


  1. We have already gone past our human/boss relation-ship, centre link will grow out of control. And you still haven't answered me this question. When your children leave school, where are they going to go? You humans are ........................ I'll just bite my ..... P,s and Q,s. Females are the only ones that can make human life! And simply say to them, would you , if you love your child, would you bring it into this world. I mean' think about it! you will be commending them to nothing!

  2. If we humans out grow our situation, no good will come of it.

  3. In terms of a potential reduction in utility from immigration, perhaps current austrayans are justified in excluding others from entry. However, one doesn't need a calculator to know that the impact on current austrayans is second order to the welfare gain of the immigrant, without considering the likely high welfare benefit (from remittances) to the immigrant's
    relatives in the country of origin. In other words, arguments for a small austraya are generally from people who draw a sufficiently small border around people who they are concerned about.

  4. Interesting point thefarmer42.
    If there is a cost to existing Australians from accepting immigrants, I think it should be our choice how many we accept. I don't hear big business calling for higher taxes to fund foreign aid, yet if we are concerned about the welfare of foreigners, then that's what we should do.

    Further, we typically accept the most well qualified people instead of the poor. Dick Smith made the point that highly skilled people in developing countries are using their skills to enable them to migrate to Australia. This is a huge cost for their country of origin, which often funded their training, to not share the benefits of their productive potential.

  5. re: "our choice how many"
    Yes it is the choice of austrayans to say how many, but I think my point is that in making the decision, austrayans should consider the welfare of humans not limited to those within your borders. Why extend our view? Not least to demonstrate to ourselves that we are indeed human, or if I make less assumptions about what it means to be human, at least a wider viewpoint can demonstrate we have some of the better characteristics of humans, at least some of the time.

    re: "big business calling for higher taxes..."
    Do you take your lead from bug business? Do you wait for big business to call time for a toilet break before heading to the thunderbox? Then why would citizens wait for big business to call for higher taxes to fund aid? In other words, it is an individual responsibility to request their government to meet the target of 0.7% of GDP towards international aid, and a reasonably large proportion of the population support this target.

    re: qualified vs unqualified immigrants
    I don't have the statistics on the split. Immigrants with skills in demand help the productive potential here, given at least short term imbalances between demand and supply of specific types of labour eg doctors. Does this mean that we discourage future austrayans from entering the trade because the salary reward hasn't increased from the domestic shortage? Quite possibly. Does it mean that the source country then faces a shortage of staff in that occupation? Yes. So, here are the options.
    1. No trade: Austraya supplies its own staff, as do other countries. More would need to be spent on training here, and wages for in demand occupations need to rise to encourage others to join these occupations. Time lags are a cost to the economy here.
    2. Trade (status quo): Austraya fills its own shortages with its higher wages, leaving the shortage in the hand of other countries.

    There are economic and moral issues here. Perhaps you'd like to have a stab at them in a further post?

  6. Immigration is <10% Humanitarian, 30% family migration and 60% skilled, from Dept Immi numbers quoted on Population puzzle website.