There are many instances where the dismal science of economics embarrasses itself with the way the economy and its parts are measured relative to the lived experience of the general population.
One of the most common and popular examples used to illustrate this problem in economics is how growth of gross domestic product can be increased if a forest is chopped down and sold in the export market.
In this example, the money received from the wood and the wages paid to those chopping down the trees and transporting them to the port are extra GDP.
Which presupposes, in this example, that all you have to do it chop down trees and the economy is performing well, at least as it is measured in GDP terms.
Isn’t economics good?
Not so fast.
As soon as the last tree is chopped down and exported, the economy will fall into recession. There is no more output and no more trees to sell.
Jobs are lost and the tree-driven economic boom is over. And just as importantly, the forest is gone forever, reducing the well-being of the animals and people who used to enjoy the non-monetary benefits of having the forest. These losses are not directly measured in the national accounts.
This example fits well with much of the current discussion on Australia’s population growth.
The bottom line GDP numbers look great, with 27 years and no recession.
This is a remarkable achievement. Well done, Australia.
RBA Governor, Dr Phillip Lowe recently noted that high levels of immigration continue to give Australia a young and skilled workforce and that “Australia’s demographic profile is more positive than those of many other countries. It is one of the factors that provide a basis for optimism about the future of the economy”.
This means that all we need to grow the economy is have lots of young, skilled and relatively rich people to migrate to Australia, year in and year out, and the bulk of our economic problems will be solved.
Unfortunately, this simplistic attitude is not that clear cut for reasons people reading this on the bus, stuck in traffic, will well understand.
The wonderful 27 year GDP growth record of Australia and Dr Lowe’s assessment about the desirability of high levels of immigration are, to a significant extent, simply a reflection of more people being here. 25 million people now as opposed to 20 million people abut 15 years ago, will mathematically add to GDP when they eat, rent a house, buy groceries, have a holiday, drive their car and consume the usual array of services.
GDP doesn’t capture quality of life
It doesn’t automatically mean that everyone is better for this extra GDP. There is nothing clever or innovative about it.
Australia’s GDP enhancing high population growth is coming at a cost of things not well captured, if at all, in the GDP data or measures of individual well-being.
Missing are things like the time spent sitting in congested traffic in competition with other drivers trying to go to work to earn the money to service a massive mortgage that is needed because of strong demand for housing from hundreds of thousands of new immigrants pushing prices higher. These are the consequences of population growth outpacing the supply of houses, transport, other infrastructure and social services.
The unmeasured but still very real costs of a shortfall in funding for schools and health care facilities, that are stretched as more and more people compete to use those services relative to the ability of the government or private sector to ramp up supply of those services are other costs.
Adding to GDP by chopping down trees or having an unexpected and uncatered for extra mass of people is not good economic policy given these costs.
In a decade or so from now, Australia’s population will likely rise to 30 million or so, from today’s level around 25 million. These extra people will, undeniably, add to GDP and growth through their work and spending patterns.
But how will the economy cope with these 5 million extra people, competing to use the same roads, buses and trains and competing to buy or rent the stock of dwellings? Is there enough being done to ensure that all 30 million Australians in this example in 2030, will get great schooling and education, world-best health care and relatively easy access to work?
It appears not.
There is no doubt that immigration has served Australia well, as a vital and essential part of Australian society, decency and its economy.
But like the very best red wine, it is possible to over-indulge and be left with a nasty hangover if there is too much of a good thing.
There is absolutely no doubt that Australia can cope very well with a population many multiples of today’s level. 100 million by 2100? Why not!
To make a high level of population economically viable and acceptable to society, there needs to be the physical and service-based infrastructure to allow 30 million or even 100 million people go about their business efficiently and with reasonable access to services that they should rightly expect.
Many countries do this well.
The fear from governments and other policy advocates is that a preemptive lift in infrastructure spending ahead of a population surge could create a white elephant, with suburbs built that no one moves to.
Suffice to say, there is a case at the moment for trimming the rate of population growth to allow for the infrastructure to catch up to the number of people living here. This might mean a scaling back in various components of the current level of immigration, excluding the humanitarian intake for what should be obvious reasons.
Sure, the RBA and others may note that lower immigration will lower the rate of economic growth, but just like past decisions to stop dams and preserve and protect forests have reduced GDP, isn’t it good that someone had the foresight and courage to do so?
Stephen Koukoulas is a Research Fellow at Per Capita.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.