Response to Heath von Ocelot’s rejoinder

I’m not quite sure that there’s much point going into the weeds with someone whose legendary sloppiness with details led him to call me “Tom Westlake” throughout his rather lame attempted rejoinder (it’s since been silently fixed, so thanks, I guess), but since people seem to want a response, here are some loosely categorised points. It is, by the way, merely a response to the internal logic of the Malthusian (or, as I think I will start calling it, the international feudalist) position. I am not going to try to address the implied moral logic of van Onselen: that the criterion upon which we ought to judge immigration policy is the welfare of incumbent residents. As it happens, I think this is a deeply unethical social welfare function. But that is a matter of philosophy, not economics, and I shall try to stick to the economics.

Fiscal impact of lower-income recent arrivals

It’s not the case that because new arrivals have lower income than incumbents now, that they therefore must be a drag on the economy because they make a smaller fiscal contribution. This is because fiscal contributions have to be measured over the course of a lifetime, and migrants could make up the ‘deficit’ from their first years in later years. Obviously it’s impossible to determine what the fiscal contribution will be for the current batch of ‘new arrivals’ but there is some evidence in the census that earlier cohorts of migrants do outearn the Australian-born cohort after a period of time. There is plenty of reason to suppose that migrants might earn, on average, a lower amount of income at the beginning of their time in Australia but later earn higher incomes: they might be students, for example, and then become employed later, or they might be the spouse of a migrant who is initially unemployed but who later finds a job.

By the way, van Onselen’s attempted critique on this point would also need to address one of the other clodhopping analytical errors he made, but which I didn’t have space in my Guardian article to critique. A while back, he complained that migrants had ‘aged’ Australia, a claim based on the median ages of migrants and non-migrants in the ABS Migration report and the Census. The problem with this is that both the report and the Census count children born to migrants as Australian-born. If—as, logically, you ought to—you count the birth of children of migrants as a result of migration, then the way both the Census and the report define being a migrant will incorrectly overstate the impact of migration on population age. Similarly, an accurate assessment of the net fiscal impact of migration also needs to take into account the future tax paid by (as well, of course, asthe asset and liability dilution effects of) children of migrants.

Capital dilution

Van Onselen attempts to critique my (by the way, accurate) assertion that most of the literature suggests very minimal or zero wage and employment impacts of migration on incumbents by referring to general equilibrium modelling conducted by the Productivity Commission. I’m mildly surprised that a site like MacroBusiness that is so often critical of mainstream economics puts such blind faith in a CGE model. The PC’s model is a way of trying to simplify the complexity of our theoretical understanding of the economy into a large number of equations. This kind of work is definitely useful for tracing the complex interactions of various assumptions, but they are just this: theoretical assumptions. Van Onselen has been rather dismissive of the huge amount of careful econometric work in migration economics, for reasons he prefers to keep to himself, or (I wish this were a joke) because they’re conducted by academics who work for a university that accepts foreign students. Econometric analysis is also reliant on some assumptions, but van Onselen doesn’t really explain how the Bruenig et al. results emerge as a consequence of the assumptions they make. (Also, and this is minor: it’s weird for van Onselen to separate the Commission from Bruenig et al. and say he prefers the one over the other, since their paper was written specifically for the Commission as an input to its report, and was published with it. Presumably if the PC thought it wasn’t very good—and Bruenig is one of Australia’s top labour economists—they wouldn’t have published it.)

The results that van Onselen focuses on from the PC model, however, are. The model does forecast a drop in labour productivity and wages from migration, but this is entirely a result of the modelling assumptions rather than based on any empirical evidence. The PC’s general equilibrium model assumes that when each cohort of migrants arrives, the capital stock is unchanged at first and then slowly adjusts to meet the new arrivals so that the capital-worker ratio recovers. This will naturally lower labour productivity until such time as the capital stock is increased. As the PC explicitly says, this ‘abstracts from the possibility that firms anticipate changes and adjust employment, investment and output accordingly’. So, if migration is held relatively constant over the next thirty years, say, firms might very well invest in new capital in anticipation of each cohort arriving, rather than being ‘surprised’ by the arrival of new migrants every single year (as the PC’s model assumes). Unfortunately, the empirical/econometric evidence regarding the responsiveness of capital supply to a predictable increase in migration is very thin. We really don’t know much about firm behaviour in this case.* But the PC’s assumption that they don’t anticipate changes in labour supply and aggregate demand at all is an extreme one, probably wrong, and bound to overstate the extent to which migrants dilute the capital stock. (By the way, the focus on asset dilution also obscures one benefit of migration: it also dilutes national liabilities, like the national debt, which is accumulated by incumbent residents but paid off by both incumbents and migrants).

Van Onselen also argues that it is implausible for public infrastructure spending to keep up with net migration at its present rate. This is asserted, but nowhere buttressed by logic. The fact that it has failed to keep up does not mean that a better policy on infrastructure provision (and a settled understanding about the size of future migrant cohorts, to help planning) could not allow us to keep up.

Arguments LvO simply doesn’t address

  • We are inside the production possibilities frontier for infrastructure provision as a result of bad policy, and it is immoral to have people who weren’t responsible for that inefficiency (potential migrants) pay the cost for these avoidable deadweight losses rather than the people who were responsible (incumbent Australians). Van Onselen complains that it is a ‘strawman’ to say that he wants to punish aspiring migrants. It isn’t. It is a simple logical conclusion of his desire to reduce immigration in order to reduce the strain on infrastructure. For whatever level of migration is considered to be acceptable from the point of view of infrastructure provision, it is undeniable that more intelligent infrastructure provision that didn’t waste our money on poor-value projects would raise that ‘acceptable immigration’ figure. Therefore, to propose cutting immigration without first fixing the massively wasteful policy system of infrastructure provision in this country is indeed to punish people: they want to come to Australia, and we say no because we’re too lazy to collect the economists’ proverbial $100 lying on the footpath. Van Onselen mightn’t like to acknowledge the impact his preferred policies would have on migrants who they would shut out, but they are undeniable, and, in my opinion, immoral.
  • In the presence of migration, per capita GSP changes—or, in general, any measure that compares the average of incumbents at time t with the average of incumbents and migrants at time t+1—are not informative about living standard changes (in both magnitude and sign) for either incumbents or migrants. This is a matter of simple mathematics. Van Onselen doesn’t explicitly address this part of my critique, and indeed I am not sure that he even quite understands it, since he still complains about migrants ‘dragging down average income’. Van Onselen’s argument about GSP is rather like putting a couple of green apples into a bowl of oranges and complaining that, on a per capita basis, the oranges are greener than they were before.

There are other problems with van Onselen’s analysis, but since I’m trying to write a longer, more reflective piece about the politics of migration in Australia, and since it’s my birthday today and I don’t really feel like spending the rest of it arguing with the Carlylean hysterics and alt-right anime nazis who inevitably flood your Twitter notifications when you talk about mass migration (I’m not saying van Onselen is either of those by the way, or that all opponents of high immigration are racist, just that in my experience this characterises a depressingly large number of the people who do respond when you write about this**) I will leave them for another time.


*If migration is entirely unanticipated (which is very unbelievable), then the rule of thumb in migration economics is generally that wages will fall, roughly, by the amount of the Cobb-Douglas coefficient on capital, or about 0.3%-0.4% for every 1% increase in population. To me, this sets a bound on the likely range of wage impacts. Of course, this works in reverse. A cut in migration numbers that was predicted by businesses would result in lower capital investment, and hence the wage impact of the drop in labour supply would be partially or totally counteracted by the investment response. Which seems to argue that the Malthusians shouldn’t be so loud about what they’re trying to do. They should focus on persuading politicians very quietly of the need to cut immigration. Then, when the politicians announce an unexpected decrease, since businesses will not have anticipated this immigration drop when making their investment plans, workers will have more capital each and hence higher wages, at least temporarily. This calculated reticence would have the added advantage of clearing my Twitter notifications of stale, repetitive arguments.

** Or sexist. Though I don’t hold people responsible for the comments made by people on their site, especially if they can’t afford moderators, nor, if I were running a commentary website like MacroBusiness would I be particularly proud of the calibre of discussion that was published in the comments section of the response to one of Jess Irvine’s recent pieces: