High cost of immigration: GDP gets the sign wrong

Much of the alleged economic benefit of high immigration is actually a very large cost. GDP is not accounting, and its misuse as a measure of welfare distorts our priorities, in this case egregiously.

[Can’t seem to interest anyone in this argument. Looks like it can’t be right I suppose.]

Kristina Keneally, Labor’s immigration spokesperson, recently set the dogs barking again by arguing that the rate of immigration after covid-19 should be lower than the previous very high rate. She argued that we should look to get Australians back to work before importing more people (though her choice of phrasing could have been better).

The sudden dramatic drop in immigration is evidently of great concern to some, judging by a spate of opinion pieces at the ABC (e.g. here and here) and elsewhere reiterating the usual claim that a high immigration rate is good for the economy, or even essential to the economy.

Some of the arguments are flimsy or marginal at best, but a central one is that immigrants create jobs, rather than taking jobs. Presumably this refers to the construction of houses and other facilities required by immigrants. Certainly the construction industry benefits from a lot of extra work, and this will show up as a large addition to the Gross Domestic Product. The Prime Minister will then brag that ‘the economy’ has grown.

However we need to look more carefully at what really happens. First, most of the facilities required by immigrants are built before they arrive. We do not just send them to some green-fields site and invite them to build a town for themselves. This means the cost of building the new facilities is borne by those of us already here. It is irrelevant whether the cost is borne by the private sector or by government: the cost is borne by our society as a whole, regardless of which sector pays for which facilities.

There is an opportunity cost involved in this arrangement. To be sure, many people find employment, but what other things might we have spent our money and effort on, and would we get more benefit from them? We might, for example, choose to raise the unemployment benefit permanently, or to improve our education system and thus improve the skills and productivity of our young people. We might speed up the transition to clean renewable energy, which would also provide many jobs and make the economy more productive.

A house provides a service to its occupants, but it does not provide a return on investment the way a new factory would. Certainly the immigrants, once they are established, will be productive members of society, but there is a delay, and a cost to us, while they get established.

How big is the cost? We have been importing as many as 400,000 people per year, net. That means we have in effect to build a new city the size of Canberra every year. That includes, houses, shops, roads, water, power, office buildings, everything, public or private. The cost of all the extra ‘durable assets’ was estimated by Jane O’Sullivan some years ago (summarised here). It comes to around $500,000 per new person. The total cost over recent years has thus been of the order of $200 billion per year.

If this amount seems outlandish, think what it would take to build Canberra in a year. Even if O’Sullivan’s estimate were a bit rough, and the cost was only $100 billion per year, you could still buy a lot of clean energy installations for that. You could pay for our universities as we used to, before they were required to become addicted to overseas student fees. You could raise the minimum wage and give the anaemic economy an immediate boost.

Nothing so far indicates that the cost of expanding our durable assets is not in fact a cost. There might be some compensating benefits, but they will be delayed. The higher the immigration rate, the more has to be built every year and the bigger the imbalance. Mainstream economics doesn’t do imbalances or rapid changes, intellectually fettered as it is to being close to an entirely fictional equilibrium.

You might call the cost an investment, but we don’t distinguish capital expenditures from recurrent expenditures as we once used to.

If we had proper national accounting there would be a balance sheet for recurrent expenditures and incomes, and a balance sheet for capital expenditures and benefits. Then all of this would be clearer. You could add up each side of the balance sheet and see if we are actually better off. (Perhaps such things exist, but they don’t make the headlines.)

Instead we add the expenditure to the Gross Domestic Product and claim ‘the economy’ has grown and we are better off. GDP is not accounting, it is a crude tally. No distinction is made between spending on good things, useless things and bad things. Clear felling a forest is a plus. Cleaning up pollution is a plus. Digging holes and filling them in would be a plus.

GDP was never intended to be a measure of our general welfare, and its originator Simon Kuznets clearly warned against using it as such. During the war, when the US government was directing much of the economy into war production, it made some sense to look at the total volume of production. With so many deleterious effects, on our planet, land and people, of unrestrained ‘development’, it makes no sense any more.

Some of the other arguments about immigration make no sense if you put aside economic abstractions and just think about people and what we do. Would the economy stagger without immigration? That’s silly, it implies we can’t provide for ourselves. The ‘ageing population’ is a hoary perennial, but more unproductive oldies implies fewer ‘unproductive’ children, and anyway would we not look after our ageing parents, especially if we were richer than now?

Alleged skills shortages have greatly proliferated over the past couple of decades, but really they are an excuse to import cheap labour and an excuse for governments not to fund our education and training systems properly.

The debate about immigration numbers needs not only to be had without reflexive charges of populism, nationalism, xenophobia and racism, its economics also needs to be sensibly rethought. The misuse of the GDP grossly distorts our priorities, and covers up for incompetent management of our society. The claim that immigration is of immediate benefit is a particularly egregious example.

2 thoughts on “High cost of immigration: GDP gets the sign wrong

  1. Richard Swinton

    I’m strongly in favour of changing what we measure so we redirect ourselves down a more sustainable pathway. Kuznets actually warned the US govt that GDP does not include things like wellbeing, health, and other social measures, nor did it allow for a differentiation between positive and negative activities. If we mine ore, the value of the remainder should be less, but that is ignored – like opening a shop with a full catalogue of stock and declaring a massive profit at the end of the year but not allowing for restocking! Nor does it subtract the costs of pollution, cleanup of oil spills, etc. So the Exxon Valdez cleanup actually added to the US GDP!
    We become what we measure, and we measure money flows and wealth, not well being; so we focus on those things to the detriment of the things that really matter.
    If we were to measure the social things we might have a very different approach to immigration planning – anyway, it’s highly likely that we will be swamped with applications for immigration as sea levels rise and agricultural land is inundated, and they may have to come by boat since so may airports will be flooded!

    Reply

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