Immigration is good for Australia

There have been calls for immigration to be halted, especially by the crazy right in Australia. However the consequences of halting migration would be dire, leaving Australians worse off.

The Age has written a piece describing the effect of halting migration. They point out that growth would slow, the workforce would age faster leading to a demographic imbalance and the government would face larger structural budget deficits. There are several other unpleasant consequences listed.

The article does miss one important point. Most Australian immigration is skilled migration. The immigrants go straight into the workforce without the need for expensive training and fill gaps that the economy would take years (decades) to fill itself. The result is that the supply-side of the economy is expanded (Long-run aggregate supply shifts to the right) and there is faster non-inflationary growth making everyone better off.

The unfortunate politics of immigration must be put to one side and the economic analysis of immigration considered more carefully to achieve a sensible solution. It is impossible to see a situation where Australia will not need at least 100,000 immigrants a year to avoid stagnating growth and an impossible pressure on the working population as the overall population ages.

The Age article is here

This article is directly relevant to VCE Unit 4 on Supply Side policy and to IB Macroeconomics (Paper 1). The impact of demographic changes is something that could easily put into an IB Internal Assessment piece using AD/AS analysis.

Closure of Toyota raises many (old) issues

The closure of Toyota should come as no surprise. Australia is not a place where anyone can make standard cars competitively.

There are three areas to be interested in this story, which is a VERY LIKELY candidate for the exam in November.

* Why Australia is an expensive place to make cars

* Whether governments should provide assistance to declining or uncompetitive industries

* The winners and losers from putting a tax on imports

There are so many issues here that I can't attempt to talk about them in one post, but I will return to each in the future and expand upon each heading.

For now lets think about why the car makers say it costs them four times as much to make a car in Australia than in Asia and twice as much as in Europe.

One issue is the Minimum Efficient Scale of production. The Economies of Scale of car making mean that as the size of a plant increases the long-run average cost of production falls. But unlike the 'text-book' examples Diseconomies of Scale never occur meaning that there is a point at which every additional unit of production costs the same. This is shown in the diagram below.

 

For the Australian car makers the scale of production never reaches the quantity MES, (Minimum Efficient Scale) indeed it is probably at best 40% of that quantity.

Although there are other factors to consider, such as comparatively low productivity and high wages in Australia, the small scale of production is  major reason why the car making industry was always doomed.

The Guardian has an excellent article which connects most of the relevant issues.

The Guardian article is here

Gratton supports the need for major tax and spending reforms

The Gratton Institute, an independent organisation which publishes on economic factors in Australia, has supported the Productivity Commissions view that pension changes are necessary. But they go much further.

They identify that there is a structural budget problem that will get worse. Namely the financial commitments of the government in the future to pay pensions and benefits far outweighs the revenue they will receive in years of normal economic activity with the current tax regime. The result will be a persistent budget deficit.

The Australian tax system is a mess. Nobody really understands it and it is full of concessions to vested interests which are politically difficult to change.

None of this is new. The Henry Commission pointed this out in 2008. What the Gratton institute want is a higher pension age, restrictions on accessing superannuation funds, an extension of the GST to things like food and education and a cutting back on tax concessions.

The 'demographic time bomb' is a very real threat to the budget. The debate on how to deal with it is now getting into gear and may dominate the next Federal election.

The Guardian reports on the issue here

The Gratton Institute report can be accessed here

It might not seem urgent, but it is

The Productivity Commission has proposed raising the pension age to 70. This is bound to make a lot of people unhappy, but it is a vital supply side reform that needs to be acted on now to avoid a crisis.

Actually there are two things that have to be avoided.

1. The budget deficit that will arise due to lots of non-working pensioners who don't earn to pay income taxes but do receive benefits (pensions) and demand public services, such as Medicare.

2. The reduction in the relative, and probably absolute, size of the working population. Those working will have to pay the taxes and produce the goods and services that the retired population needs. It would create a huge burden on them.

So the Productivity Commission's plan helps with both. The government does not have to support people for three extra years, probably saving about 10% on the pensions bill. The budget will be healthier as a result, with government spending being lower than it otherwise would be.

Further the size of the working population will be larger as those aged 67 to 70 are encouraged to stay in the working population. Not only does this add revenue from income taxes to the government, it also boosts Aggregate Supply. Any rise in the labour force shifts the AS curve to the right. The result is higher output and lower inflationary pressure.

The third effect worth noting is in income distribution. Here we must consider inter-generational equality. The young don't have such a heavy burden to support the old. While old age pensions have allowed a much kinder and fairer society in the past the ageing population will cause an increasingly unfair burden in the future.

Why is it urgent that action is taken now? Such a measure cannot be introduced overnight. A 66 year old cannot be told in 2014 that he/she cannot retire until they are 70. They need to plan for such a change. So if this measure is adopted the retirement age will probably rise a year at a time over a decade.

The ABC reports the story here

The 2012 data clearly shows how the pension crisis will hit Australia in the next 20 years

The Great Australian Complacency - the real issue

Ross Garnaut is probably the best known Australian economist working in Australia (Geoff Harcourt is the best Australian economist, but is at Cambridge).  Garnaut has the ability to pinpoint the real issues facing Australia, as he did with climate change.

He has now entered the debate about the great danger that faces the Australian economy, namely it is high wage and low productivity and there has to be a unified and bipartisan approach to solving this.

The article below was motivated by Maurice Newman's contention that its all the fault of a high minimum wage in Australia.  Newman is an adviser to the idiot Abbott and a climate change denier and represents the sort of partisan politics that Garnaut is arguing has got to stop.

Lets deal with productivity first.  Productivity is a measure of efficiency, how much of an input has to be used to produce a given amount of output.  The higher the level of productivity the higher the level of wages that can be afforded.  Productivity is raised by investment in capital and people and using resources to their maximum potential.

Australian's are complacent about the challenges of the future according to Garnaut. They want higher wages but are not prepared to make the changes necessary to raise productivity.  He blames the pursuit of self interest by unions and employers and the disfunctional process of government.

Newman on the other hand wants the minimum wage to be lowered to make it cheaper for firms to employ people. He also wants lower taxes on firms. Both raise profits.

The contrast between the approach of the academic, Garnaut, and the vested interest of business, Newman, is something those studying Economics must be able to distinguish between. 

The data in the article on Newman shows that Australia does have a high minimum wage.  It's Australian to aim for greater equality and such a choice is quite reasonable by a society.  But that does not mean people can simply sit back and enjoy the  them, they have to justify the high wages with high productivity. 

Just to be clear this is not just the fault of business as represented by Newman.  The 'new Founders building' would have been ready for the start of Term 4 in Europe, but union intransigence on work practices means it will be a close run thing for Term 1.

Garnaut's article is here

A review of Newman's tripe is here with some great data

Rare sense from the Coalition on borrowing

The Coalition made a great show of claiming the budget was in crisis for the last five years. While this was simply (bad) politics it has clouded the issue to a dangerous degree as people believed the propaganda.

Now the Government are considering the very sensible move of distinguishing between borrowing to fund investment and borrowing to pay everyday bills. This is quite normal in other countries.

The argument works like this. If you borrow money and buy ice cream then you are simply funding consumption today and will have to pay back later. But you have nothing to show for your borrowing except a bigger waistline.

If you borrow to buy a business then you are borrowing to fund future consumption. While you have to pay back the loan you have bought an income stream to do that and make a profit.

For the government it is a similar story. If they borrow to pay the wages of government employees and to subsidise prescription drugs then they are buying ice cream. It does somebody some good now but you have to pay it back later which means higher taxes.

When the government funds infrastructure spending through borrowing they are adding to the capital stock of the nation. It allows businesses to operate more efficiently and competitively. The government has given the economy the chance to grow more quickly than it otherwise would. The higher taxes paid by individuals and firms in the future pays back the borrowing.

The NBN, new railways and ports are all good examples of infrastructure spending, while higher spending on schools and universities adds to human capital. They all add to Australia's ability to produce goods and services at competitive prices.

From this it follows that borrowing for infrastructure is good, providing the benefits outweigh the costs. In a modern economy the government should always be in debt to fund infrastructure projects as part of a long term supply side policy.

Therefore the stupid contest between political parties to return to an overall surplus faster than the other is fundamentally flawed. The change to distinguishing between a deficit to fund current spending and capital spending needs to be done and Joe Hockey will have to explain this to the idiot Abbot in words of a few syllables.

The Financial review has the story here

The dangers of not competing

Qantas have announced they will stop maintaining aircraft at Avalon. Despite the protests of the engineers they have themselves to blame to some degree.

The decision will mean that part of the Qantas fleet will be maintained abroad where it is much cheaper to do so. While this is unfortunate, especially for Geelong who might welcome Australia's first nuclear power plant right now, it is an illustration of the benefits of trade.

As Qantas will be able to save money on maintenance by this move they will be able to charge lower fares. Those lower fares will benefit Qantas consumers directly and other passengers as it adds to competition in the market.

There is no point complaining about lower wages abroad or lower quality (first may be true but the second isn't). The fact is that countries should specialise in what they are comparatively best at and import the rest. In the long run nobody wins by subsidising uneconomic industries, the taxpayers and consumers pay more for a brief period of higher wages and employment for the inefficient.

The actual answer is to invest in human capital via education and training to make Australia competitive in the high tech, knowledge based industries that will allow Australians to maintain their standard of living. The alternative is to drop living standards to those of the bulk of the Asian Pacific region. There will be few takers for that.

The Age reports the Qantas decision here