Most of Australia’s current population growth derives from its net positive migration intake.  This intake has proven controversial from the viewpoint of a [...]]]> I’ve spilt a lot of printers ink on this topic over the years. Here is a draft of some notes I prepared for a Productivity Commission meeting next week. Comments welcome.

 Most of Australia’s current population growth derives from its net positive migration intake.  This intake has proven controversial from the viewpoint of a number of environmental concerns – a major one being the adequacy of water supplies but there are also concerns with increasing congestion in cities and with increasing costs of providing infrastructure on city boundaries.   At the same time business groups, and particularly the housing industry, clamour for higher immigration to boost demand and to grow the economy (Clarke et al, 1990).  

These alternative views comprise two alternative extreme ways of looking at the relation between population size and the environment.  The first dates to the Reverend Thomas Malthus’s An Essay on the Principle of Population. This sees environmental resources – Malthus took specifically agricultural land – as common property.  With population increase, existing cultivated land must be more finely divided among the progeny who came to cultivate it. In the absence of technical progress, this division would reduce the productivity of labour on existing land and force cultivation onto land with lower agricultural productivity.  Both at the intensive and extensive margin, the result was lower labour productivity and lower incomes.  While Malthus focused on land his views apply to any common property resource subject to congestion externalities – fish populations, forests, water and biodiversity resources, congested roads or the right to pollute the atmosphere with CO₂.

Environmental resources can, alternatively, be viewed as assets that are private property subject to clear property rights.  With this extreme view, increased demand for use of resources by new people increases their value to the pre-existing people who own them.  This ‘market-broadening’ view sees the arrival of new people as increasing the value of assets held by the original people making them better-off.  Provided the new people who create these enhanced values judge their lives as worth living in the expanded society, the fact of extra people provides a Pareto improvement in social welfare. This is related to Adam Smith’s views in the early chapters of The Wealth of Nations on the ‘gains-from-trade’ achieved by increasing the extent of markets.  Although Smith did not expressly address the population issue he saw market broadening as a source of economic gains. Indeed from this perspective having access to extra people is precisely analogous to removing a barrier to trade such as a tariff.  Smith was mainly thinking too about trade in goods but his analysis applies today to owners of land and mineral assets, the rights to drive on private roads or, with privately-owned emission quotas, the right to pollute the atmosphere with CO₂.  

The Malthusian or common property view of the population-environment link clearly suggests restricting population size whereas the private property view suggests that such restrictions will reduce the welfare of both pre-existing and new people.

These alternative views of the connection between the environment and population clearly depend on the primary way new people gain their economic role in a society. Both of the extreme views cited are unrealistic. The common property perspective implicitly describes an idealised communist state where new arrivals gain an equal share of all environmental assets as a birth or arrival right – it might make most sense, if it makes sense at all, where land is the important environmental asset which must be shared among progeny in populations experiencing net growth. The private property view, on the other hand,  sees unambiguous property rights as potentially at least being imposed on all environmental assets – land, minerals, water, roads, the atmosphere and the right to pollute – in a type of libertarian nirvana.   New people must then buy – or be granted on the basis of a voluntary bequest – claims on environmental assets at prices that make acquisitions mutually advantageous to extra people in the population acting as buyers and the pre-existing asset owners.

Neither of these extreme views is realistic for a host of reasons. The Malthusian view ignores the possibility of technical progress that increased the productivity of agricultural land in the face of enormous population increases. It also downplays the economic drivers of fertility that will mitigate its pessimistic implications. In the face of declining incomes parents will choose to have fewer children.  Gains-from-trade arguments on the other hand suppose all environmental externalities have been internalised by pricing or other policies when they are clearly not.   Indeed, such failures provide the rationale for modern environmental economics.   The gains-from-trade view does however does admit foresight as a determinant of migration-driven population increase as well as natural fertility.  Parents facing reduced returns to raising children – or migrants facing higher costs of getting established in a new society – face reduced incentives to add to or join a society.

The key institutional feature of modern economies relevant here is that they are mixed economies – a mix of both privately-owned assets including environmental assets and common property or public goods.  For the most part we have to buy land to grow crops or build houses on from land owners.  But travel on roads is for the most part unpriced as is (for the most part) the release of greenhouse gas emissions and other pollutions.  Resources such as water have property rights enforced on them but they are often underpriced and there are restrictions on the extent to which water can be traded among alternative types of users.  Biodiversity resources are often not marketed at all – indeed it is illegal to do so – for what are often seen to be ethical reasons.

I mention unpriced or underpriced resource assets and services but the same argument applies to the provision of a wide variety of publicly-provided goods – the social security system generally and specifically education and health services.  These can, in principle, be provided publicly or privately and the implications for desired population size depend on this choice.   The more unpriced environmental assets and the more public goods there are the greater is the potential for increased population to damage the welfare of the pre-existing population and to be immiserising.

Recognising this mix suggests a way of making judgements about the desired size of population relative to the environment.  Having extra people – whether they are migrants or the progeny of existing people – provides gains-from-trade between them and pre-existing people provided there are clear property rights on social resources in short supply.  To the extent that environmental resources or – publicly-provided goods – are inadequately priced these gains are replaced by the deadweight losses that are inflicted by environmental and other externalities. 

This suggests that restrictions on population become increasingly less important the more comprehensively use of the environment (and indeed the provision of health and other services) can be priced.   This means new people whether they are children of current people or new migrants must buy their way into a society on terms acceptable to current people. Environmental economics shows that we benefit from pricing such resources with or without population increase so pursuing such policies is ‘no regrets’ option. Moreover, in the presence of the option to increase population, the opportunity cost of not pricing increases because increased externalities will eventuate unless pricing is employed. If the choice instead is made not to price the environment but instead to restrict population, then society must forego the gains-from-trade associated with population increase. We are better off pricing the environment properly because gains arise from doing that directly but also because we can then better enjoy the gains from a possibly larger population.

This suggests a refocusing of the debate on the size of Australia’s population away from speculation about long-run population targeting – these are often irrelevant anyway given year-to-year variations in the immigration intake – to thinking about the sorts of environmental (and other) policies that should be put into place to help ensure that current citizens get benefits from the environment and to ensure future population increases will not immiserise us (Clarke, 2003).

Many straightforward environmental pricing policies have already been implemented in Australia and, compared to many other countries, the quality of the Australian environment is very good. I don’t agree with Don Henry (2011) that Australia’s track record has been that bad. The important pricing issues that do remain either involve complex distributional or transaction cost issues (congestion pricing road travel in major cities, pricing infrastructure on city boundaries), or involve complex issues of assigning values to non-marketed goods such as biodiversity and the environmental uses of water.  Unfortunately these are all population-sensitive environmental concerns.

Comprehensive pricing of the environment is difficult.  Environmental valuation issues raise questions about the usefulness of efficiency-based welfare economics in resolving issues of optimal population on standard utilitarian terms.  Assigning values to biodiversity, wilderness, the desire for space and partially developed landscapes involves assessing intensely subjective issues that reflect including ethical uncertainties.  Economic analysis only brings into focus a range of insights into how large our population should be from an environmental perspective.  

Don Henry’s (2011) remarks deal with ‘planning’ approaches to dealing with environmental concerns rather than market mechanisms. These might make practical sense in situations where social valuations are unclear and where achieving clarity over objectives is a problem.  But many key environmental concerns arising when population increases can be best dealt using market mechanisms.  Infrastructure levies effectively limit growth of unwarranted urban sprawl. Correctly pricing traffic congestion reduces both low-value vehicle journeys in cities and the propensity of cities to sprawl unnecessarily because transport is underpriced.  Don Henry mentions the reduction in water use that has been driven in our cities by means of water supply restrictions during the recent drought but, as a long-term measure, the correct pricing of urban water supplies will achieve these same sorts of objectives at much lower cost.

Economics does not provide all the answers but it provides some.   The key lesson of economics is that what matters most is not population numbers but what people who live in Australia can do. It is difficult to provide a logical calculus that suggests how many people should live in Australia but much easier to set in place environmental policies that ensure extra people provide advantage rather than disadvantage.   If Australian environments do become poor that is not a consequence of excessive immigration but of poor environmental policy.

References

H. Clarke, A.H. Chisholm, G.W. Edwards & J.O.S. Kennedy, Immigration, Population Growth and the Environment, Bureau of Immigration Research, Melbourne 1990.

H. Clarke, “Should Australia Target Its Population Size?,” Economic Papers, 22, 1, 2003, 24-35.

H. Clarke & Y-K. Ng, “Immigration and Economic Welfare: Resource and Environmental Aspects”, The Economic Record 1993, 259-273.

Don Henry, “Sustainable Population: Just “Better Management” of Growth or Something More Far Reaching”, mimeographed, 2011.

Mark uses the Solow-Swan neoclassical growth model – a representative agent model – to suggest that claim that reduced population growth will increase living standards.  This [...]]]> Mark Crosby over at Core Economics has a post on population economics that created stress for me.  Stress because it argues an intellectual position I (and many others) have being trying to combat for many years.  

Mark uses the Solow-Swan neoclassical growth model – a representative agent model – to suggest that claim that reduced population growth will increase living standards.  This claim is, in fact,  probably correct but you can’t get it from a neoclassical growth model and attempts to do so lead to the policy error of trying to address population size as a primary concern rather than what people can do once they join a population. Such a model effectively assumes a communist state where new people share equally in the extra output and assets generated by their existence as a birth-right without paying anything. This this isn’t the way competitive markets operate at all.

Having extra people in a neoclassical world without market imperfections increases the gains-from-trade to the original residents sanctioning the increase. The original people have increased opportunities to trade because the new people (whether migrants or the progeny of original residents) exist and therefore offer more potential trades. Admitting more people is like removing a prohibitive tariff on international trade – more potential trades can occur – so that Pareto welfare gains must inevitably result.  This is first-year economics though generations of thinkers in the area of population economics have manufactured theories which obscure this.

The ‘common property’ error says that new people gain access to a society’s assets without paying anything – in particular they share equally in the returns to the pre-existing capital stock. In fact extra people (migrants or your children) must either buy assets (housing, cars, equities, business premises) from pre-existing people on terms that are acceptible to the original owners or (luckily in the case of progeny) have them assigned as voluntary bequests. On all these bases there are gains to the original people since no-one twists their arms to do such deals.  Provided the new people are happy living – so the newborn don’t wish to suicide and migrants don’t want to go home – then the newcomers are better-off as well.  We are all happily better off (on average) when there are more of us provided markets work! Bliss!

Of course the neoclassical model itself is totally wrong and misapplied in this situation. But there is a real and substantive case against population growth has nought to do with the main factor Mark identifies, namely spreading the capital stock more thinly over a bigger population.  It has to do with distortions in markets which mean extra people don’t necessarily add to welfare – subsidised education and health schemes, the existence of unpaid-for public goods and environmental externalities such as congestion and population-induced pollution, adverse selection of high risk migrants with poor health or with terrorist inclinations are all enough to mean extra people do not necessarily imply average gains to all. Its these distortions – not numbers of people or growth rates in numbers of people –  that should be a policy focus in addressing population size issues.

In addition equity issues arise weven if there are gains-from-trade vas a consequence of population increase. Having extra people – who have no capital resources – switches the functional distribution of income against labour.  Wage earners can lose out even if there are average gains to all overall. This is an important issue in Australia where workers are identified as the long-suffering children of Jesus and capitalists are seen as cigar-smoking narks who fleece the masses of their hard-earned savings.

All these concerns (externalities, equity) can be addressed by pricing the externalities and taxing the capital gains asset owners (e,g. house price gains) derive – a broad conclusion myself (and many others) have been arguing for 20 years or more. Another way of putting this is to say: the better we price the environment and get rid of pure public good inefficiencies the more we can enjoy the gains-from-trade advantages of a larger population. Ditto if we are prepared to remedy equity concerns with redistributive taxes.

The communist inspired myths of the neoclassical growth model parable tell us zero about how competitive economies respond to population growth.  The problem is that an externality has crept into this model – namely that assets are common property and not individually owned.  That’s at best an exaggeration and at worst a myth. This externality is an artifact of ‘representative agent’ modelling – but there are real externalities and equuity concerns which are not at all artifacts.

Generally my view is that we should be wary of unbridled population growth because of the externality, public good and equity concerns I raise.  I used to argue strongly for removing these distortions but, while that’s true, there are long-run political constraints on doing this.  These constraints are real and hence we should be cautious about moving towardsw a much larger population on the basis of competitive equilibrium arguments.  In addition, I think there is an optimal degree of solitude in society – too many people can be hell because the flood of messages overides the gains-from-trade.  An interesting question is whether the birth rate and demands for immigration are elastic enough with respect to the efficiency-promoting policies I mention so that a long-run population emerges which prevents the Australian population from reaching 5 billion even without anti-natalist policies or immigration quotas. For example, if we do levy congestion taxes in our cities and price all other analogous externalities will the birth rate drop and will fewer migrants wish to come here. My guess is that with enough people the externalities and income redistribution effects will become so severe that population will converge towards a replacement level not too far north of where we are now. But that is a hand-waving guess that I’ll leave to a new generation of population thinkers to resolve.

‘Asylum seekers brought to Christmas Island and found to be genuine refugees should not be automatically granted a visa entitling [...]]]> An excellent article on asylum seekers by Ken Parish.   I agree with the central argument that queue jumping should be prevented.  John Howard was right – Australia should determine who becomes a citizen of Australia.

‘Asylum seekers brought to Christmas Island and found to be genuine refugees should not be automatically granted a visa entitling them to move freely within Australia.  Instead they should be given a Christmas/Cocos Islands visa entitling them only to live on one or other of those Australian offshore islands until a place can be found for them in the ordinary offshore humanitarian migration programme’.

Heading into Australian waters should not give anyone the inevitable right to apply for refugee status. This is queue jumping since other applicants under the refugee-humanitarian program do not enjoy this right. It also denies our national soverignty as a nation and places the entire migration program in peril.    Opinion polls suggest Australians agree with these views.