Tear down those walls

Jess Irvine wrote a piece on the weekend about what would happen to the Australian economy, and to Australian society, if immigration were shut off. This seemed to enrage a bunch of people on Twitter, provided further confirmation of my surprisingly robust theory that Andrew Bolt is illiterate, and provoked this detailed response from Leith van Onselen at MacroBusiness. The crux of my disagreement with van Onselen is in this paragraph:

While it is true that population growth has boosted overall economic growth (more inputs equals more outputs), the data suggests that it has made individual living standards worse. As shown in the next chart, GDP per capita has plummeted over the past 12 years as population growth has surged. In fact, the 10-year annualised rate of growth has plummeted to levels not seen since the early-1980s and early-1990s recessions:

The second sentence contains what I hope is a typographical mistake: van Onselen’s graph shows that (an average of) the first derivative of per capita income has ‘plummeted’, not that per capita income itself has plummeted. Living standards, if you accept that these can be represented by per capita GDP, have gotten better at a slower rate; they have not actually declined.

First of all, it’s worth pointing out that a long-term decline in the growth rate of per capita income is more or less what you’d expect in a rich country like Australia where the low-hanging fruit have mostly been plucked. Indeed, it’s accelerations in the growth rate that require special explanation; slowing growth is more or less to be expected from a reading of either growth theory or economic history.

 In addition, van Onselen’s causal reasoning is not particularly watertight. Although he concedes that immigration is unlikely to explain all of the decline in the growth rate, he nonetheless asserts that the GDP growth rate figures makes it ‘hard to argue that mass immigration is making us better-off’. This is very crude bivariate causal reasoning: for all we know, the growth rate might have declined even further without the increase in immigration. Simply comparing growth before to growth after provides no indication of the impact of immigration on growth; and it doesn’t, strictly speaking, provide any indication about the sign of the impact on economic growth, either (i.e., whether it’s positive or negative).

What is worse, though, is that real per capita GDP is not really a meaningful measure of the welfare impacts of increased immigration. Immigration could cause real per capita GDP to decrease (in absolute terms, not just in the growth rate) and still make everyone better off. Consider the following hypothetical. It’s unrealistic, but it highlights an important conceptual distinction.

There is an economy, Utopia*, with ten people in it. Each of these ten citizens earns $100,000 a year, every year. Utopian GDP is therefore $1 million (10 x $100,000); per capita GDP is, unsurprisingly, $100,000 ($1 million divided between 10 citizens). A few kilometres across the sea, on the island of Dystopia, is a potential immigrant to Utopia. In Dystopia, she earns more or less nothing. She has few skills, so when she migrates to Utopia, she gets a menial job and earns only $50,000—half of what the other Utopians earn. However, because of positive externalities—larger market size, maybe, leading to scale economies in production, or the fact that the migrant is visited by her family and therefore tourism exports go up—let’s say that native Utopians each now earn $101,000 a year each. Total GDP in the economy increases to $1.06 million, due to the increase in native workers’ wages and the addition of the immigrant’s wages. Per capita GDP, however, declines: dividing $1.06 million between 11 citizens gives us a per capita GDP of $96,364. And yet every single member of the economy, native and migrant, is better off than they were prior to the increase in immigration.

If a Sudanese refugee comes to Australia and gets a minimum wage job in a supermarket (and we assume that job didn’t exist before), then the refugee’s income will have dramatically improved, but Australian per capita GDP will very likely be slightly lower than it otherwise would have. This by itself does not mean that the Sudanese refugee has caused a single Australian citizen any economic harm. In general, you have to assess the welfare effects on the native population and the welfare effects on the immigrant population separately: the correct measure of the increase in economic welfare would be to examine every person’s income and compare it to their pre-immigration income, and add these up.

 Of course, a crucial moral question arises at this point: should you consider the Sudanese refugee’s (dramatically increased) welfare in this calculation? I would say that you ought to, at least to some extent, but some people—I suspect van Onselen would be among them, since he seems to endorse the idea of ‘a frank and honest national conversation about population policy, which focuses on raising the living standards of the existing population’—would rather you ignored the welfare of immigrants. But regardless of your answer to this question, it does not absolve you from the necessity of comparing apples with apples: ‘native’ income without immigration with ‘native’ income with immigration, and migrant income with immigration to migrant income without immigration.

This is quite tricky to do practically, but one thing that has been done quite frequently by economists is to assess the impact of immigration on the wages and employment levels of non-immigrants. The general consensus of the empirical literature on this topic is that the effects on native-worker wages and employment is likely to be only barely positive or only barely negative, if they exist at all.

Of course, van Onselen might respond, I am ignoring the other problems with mass immigration that he mentions in his piece: the strain placed upon limited resources, and other externalities. This is again partly a moral question and partly a practical one.

It is a matter of moral preference whether you think that Australia’s stocks of clean air and clean water (and its stock of high-quality infrastructure, for that matter, much of it built and paid for by people who are now dead)—like our stocks of iron ore and coking coal—are the property of existing citizens by right or whether you think that the unequal division of resources among the peoples of the world is largely arbitrary and often the result of historical patterns of state violence and conquest. If you believe the latter, as I do, then barring immigrants from enjoying these stocks of natural and infrastructural wealth, even at the cost of their partial degradation, is hard to justify morally.

However, even if you believe that Australian citizens have the moral right to prioritise maintaining clean air, clean water and uncongested roads that is ‘theirs’ merely by an accident of birth, then it is not obvious that you need to restrict immigration in order to do this. Part of the reason that Australia faces environmental degradation and infrastructural deficits is that we don’t make people pay for the damage they do to when they use our rivers, lakes, atmosphere, roads and so on. Comprehensive externality pricing—that is to say, pollution taxes, smarter water pricing, congestion pricing on roads—can lift a lot of the pressure on scarce natural and infrastructural resources. They would, of course, still be a good idea even if we didn’t have any immigration. But to those of us who favour high immigration rates, they should be seen as a necessary condition of high immigration into the future, just as a muscular welfare state is more or less a necessary political condition of free trade and investment, even though many people, like me, would support a welfare state in autarky as well.

Would comprehensive externality pricing fix all of the problems that migrants impose upon ‘native’ citizens? Maybe not, but it seems immoral to me to reduce immigration levels by, say, 100,000 people a year in order to reduce the pressure on roads and water supplies if you could price these things in such a way as to achieve the same reduction in externalities as you could by lowering immigration intakes.

With good policy in other areas, there is little reason to suppose that immigration has to have much of an impact on the welfare of ‘native’ citizens; and since revealed preference would tend to suggest at least some positive welfare effects on the migrants themselves, it makes sense to maintain a policy bias towards higher immigration.


(* I pick the name because in Thomas More’s fable, it is almost impossible to travel to the island without a Utopian captain to steer your vessel through the treacherously narrow entrance to the bay. I expect this rather alleviated Utopia’s need for an organism with a name like Border Force staffed exclusively by people who failed the police exam, but More is silent on this topic.)


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