After 28 years of steady economic growth, Australia is richer than almost anywhere in the world. But we’re also bitter, angry and divided. How can this be?
To help understand, it’s worth looking at where our growth has come from. Everything you gain comes at the expense of something else, and Australia’s growth has come at the expense of certain things that hold our society together.
‘The three Ps’
There are precisely two ways to generate economic growth. One is to use more inputs; the second is to combine inputs more effectively.
The latter is all about “productivity” (a dreadful and dreary word that economists love). Changes in technology and practice are the key to rising living standards, allowing us to make more from less. The fact a shirt cost a month’s wages in the 18th century and an hour’s wages today is because we can now combine inputs more effectively. Science, baby: the invention of the loom, the application of scientific principles to agriculture, etc.
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The other way to make economic growth — using more inputs to get more outputs — can be a painful trade-off. When you put something to work in the economy, it is no longer doing what it was before. If you make land productive it is no longer “nature”; if you make a person do paid work they are no longer doing unpaid work or enjoying themselves.
This has been Australia’s plan. Former treasury secretary Ken Henry’s “three Ps” model (productivity, population and participation) put emphasis on using more inputs to grow the economy. The model was developed in the early 2000s, and soon became “integrated into the mainstream of policy thinking in Canberra”.
Around this time, Australia’s population growth rate lifts:
It is also around this time that Australia’s productivity growth falls:
The influence of the three Ps model on Australian policy thinking remains pervasive in 2019. And that means the costs of growth are primarily found by looking at the downsides of population, productivity and participation.
You can create economic growth for a nation by growing its population — a policy Australia has pursued with vigour. This isn’t necessarily a bad thing. The benefits of a rising population are real and the costs can be managed if you build sufficient new homes and infrastructure.
But rising house prices in Melbourne and Sydney tell us that the number of new homes built may not have kept pace. And, as anyone who has tried to commute in an Australian city knows, higher population growth is straining transport infrastructure too.
Many of the frustrations and inequities of contemporary urban life — that feeling of being stuck in traffic trying to pay off a house — are exacerbated by the ways in which we have chosen to accelerate economic growth.
That frustration flows through to our politics, manifesting in policies that blame the migrants, rather than the policy-makers who failed to grow infrastructure and housing stock.
Australia’s labour force participation was expected to tumble as our population aged. Instead it has soared:
That retirement you were looking forward to? Ha. Time off to spend with your kids? Also not happening. No wonder we feel strained!
The lack of recent productivity growth reveals that the advances of the internet era have not created an enormous boom — at least not one that shows up in the statistics. This has sharpened calls to create productivity through economic reform.
Economic reform has a strong bipartisan legacy in Australia as a source of growth, from Whitlam’s tariff cuts to Howard’s privatisations. But these efforts to improve efficiency are not as good as scientific progress, because they are a one-off — not an ongoing process.
They can also come at significant cost: cut red tape and you lose whatever social outcome was once held together; privitise an asset and you lose whatever social outcomes were furthered by government ownership; introduce market-pricing and you further exclude those with the least ability to pay.
The pursuit of productivity through economic reform is at least partially responsible for our rising social exclusion and dislocation.
Of course, the costs of pursuing the three Ps framework have almost certainly been worth bearing. Nearly three decades of economic growth is without doubt better than the alternative and it is no use being wistful for the road not taken. Had we not pursued the three Ps framework, we would simply have other frictions and strains. But by focusing on these costs of growth we can better isolate them, better understand them, and better manage them.
Australian economic policy-making shouldn’t just be about creating growth; it also needs to manage the costs.