Friday, March 28, 2014

Does size matter? An economic perspective on the population debate

If there's one thing that's really big in the population size debate, it's the size of the scare campaigns made by both sides. One side tells us that a big Australia is a 'catastrophe', while the other says that slow population growth will hurt share prices and drive up debt.

Australians comprise just one in 300 of the world's population. We have the third-lowest population density of any country. Only Mongolia and Namibia have fewer people per hectare than Australia. Yet we also have one of the highest urbanisation rates. Nearly nine in ten Australians live in urban areas.

An unusual feature of the Australia's population debate is how much it is sparked by population projections. This is especially odd given the record of past projections. In 1888, the Daily Telegraph predicted that the population in 1988 would be 60 million. The Australian Treasury recently updated its population forecast for the 2040s from 26 million to 35 million.

And while you might think that the government has two population levers: one marked 'more babies' and one marked 'more migrants', only one of them really works. Government can control migration, but its policies have little impact on whether or not people have babies. So the population debate is really a migration debate.

In the debate over a larger Australia, there are dud arguments on both sides.

Advocates of more migration argue that size will reduce the per-person cost of government, and give us much additional heft on the global stage. I don't think there's much evidence for either of these.

But it does seem likely it will get us better cultural goods, such as international sporting events and great entertainers. If you want to host a World Cup or attract the world's best musicians, size helps.

Perhaps the best argument for a larger population is that it means more entrepreneurs. One channel for this is simply scale: if extraordinary people like Albert Einstein and Steve Jobs are one in a million, then it follows that they are also an argument for another million people. Innovators may also be over-represented among migrants. Some evidence suggests that bilingualism raises intelligence, and a global outlook is good for business (half of Australia's exporters are foreign-born).

How about the claimed costs of migration?

It is often said that a larger population will mean more traffic congestion. Over the past decade, Sydney's population has grown by 12 percent, while commuting times have grown by 4 percent. And yet while gridlock is one of the most serious problems faced by Sydneysiders today, the best way to address it is through good city planning and economically sensible policies, not population control. Even if we stopped all population growth tomorrow, cars would still become cheaper to buy and use. We should tackle congestion efficiently and directly, not via population policies that could harm Australia in other ways.

A similar argument applies to house prices, where the best approach is to focus directly on housing affordability, by removing unnecessary supply constraints, and ensuring that housing policies are as effective as possible. Even if we adopted a zero population growth strategy, rising incomes and higher marriage ages would still drive up the demand for housing, creating a good argument for getting housing policies right. Likewise for the natural environment, where market-based policies can do far more than population control to address the challenges of water supply and climate change.

Population growth has the potential to get us things we cannot obtain in other ways: better cultural goods and a more productive, more entrepreneurial culture. A larger nation has more mouths, but also more minds. Size has potential costs, but economics teaches us that these are best addressed by good policies to reduce congestion, increase housing supply and protect the environment.

Over the past decade, three in ten permanent immigrants have been family reunion, six in ten have been skilled migrants, and one in ten have been refugees. Skilled migrants are more likely to compete with high-wage workers, making the Australian immigration system quite different from the US immigration system. Some evidence suggests that the Australian skilled migration system reduces inequality.

The skilled migration system can surely be improved – for example, through harmonising occupational requirements with source countries, or better exchanging data on applicants' labour market history. But overall, it should be a source of pride.

Skilled migration will remain the largest component of our permanent migration program, and it is vital that we don't just focus on 'how many?', but also on 'who?'. If we want to have a healthy migration debate, then ensuring that our migrant mix reflects our national values and priorities matters more than fretting about the next set of demographic projections.

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