Immigration has become the top news story in all the countries I follow. It is also the most important election and political issue in many of them. Leith van Onselen of the brilliant blog Macrobusiness.com.au summed up why the best, for many countries outside of Australia too:
‘Never before have we seen a federal government wreck living standards so quickly, caused to a large extent by extreme levels of net overseas migration that is crush-loading everything in sight, pushing up inflation and cost-of-living, and forcing the RBA to retaliate with higher interest rates.
‘If the Albanese Government genuinely cared about ending the nation’s housing crisis and curbing inflation, it would moderate net overseas migration to a level that is below the nation’s ability to supply housing and infrastructure, not run it at record levels.’
In the UK, immigration is spiralling higher despite many years of pledges to bring it down. Not that the local statistics agency is proving capable of counting people. They use ‘models’ instead. And their revisions of past data would make professor Neil Ferguson blush.
In the US, illegal migration is the big issue, with bizarre border policies the result of political infighting. But now even some leaders of illegal immigrant sanctuary cities are having second thoughts…after migrants were bussed into their neighbourhoods.
In the Netherlands, an anti-immigration party won a surprise election recently.
The German government is attempting a sudden shift on immigration policy — they want a cut to more sustainable levels. This is a stark change from former Chancellor Angela Merkel’s open-door policy.
In Ireland, an anti-immigration riot recently broke out in Dublin. For me, having lived in Ireland when it opened its borders to Eastern Europe, this is like hearing your grandmother attacked her hairdresser. But a lot has happened since I lived there and saw a lot of Polish people welcomed with open arms.
The list of anti-migration movements goes on. Their momentum seems more substantial than during the migrant crisis of 2015.
Even inside the EU, which promises freedom of movement, borders are popping up to stem the flows.
But has anyone asked why immigration is spiking so rapidly right now? What caused the sudden influx which is prompting the extraordinary political response from voters?
First of all, it’s important to notice that governments can very easily control immigration. It’s entirely in their power and down to their own policy.
If governments actually wanted to crack down on immigration, they could.
So, we must ask why they don’t do it. And, more importantly, why they haven’t done so even after endless pledges they would.
Politicians must know how unpopular vast immigration is making them. They must know how unpopular their broken promises on stemming migration are making them.
But they’re doing it anyway. Why?
There must be some other bigger and more dangerous political risk to their career.
Having watched the downfall of Liz Truss’ government in the UK, I believe the answer lies in debt and GDP statistics…
Our economies simply cannot afford less migration
With all the metrics Leith van Onselen laid out, that claim might sound like outright provocation. Don’t get me wrong. I can’t get GP appointments either. Rentals are inundated with applicants. Our public transport systems are struggling.
It seems clear from the statistics that we cannot afford more migrants, not less.
But bear with me for a while. Because governments around the world face a bigger challenge than the ones caused by too much immigration…
First, consider that GDP is comprised of two things — how many people there are and how much each person produces or consumes. If you desperately need to grow GDP, you can either put in place policies that make workers more productive, or you can allow in more workers.
Productivity enhancing policies are not so popular, especially with unions and other interest groups. The media likes to have a field day with any attempts to roll back the government policies that make us less productive in the first place, like benefits, subsidies and regulations. Productivity enhancing policies can displace people in the short run, from jobs or locations, which makes them fear such change. And that change also takes time to work.
But, in the wake of the pandemic, a lot of governments don’t have time, let alone the political capital to make such changes. Especially given the crisis bearing down on them. In the UK, it already unseated one government this time last year.
The crucial pressure they’re under is debt — they borrowed too much
How much debt you can afford is determined by your income. In the case of governments, that’s their tax revenue. It’s not the country’s GDP, because the government doesn’t ‘earn’ everyone’s GDP. But, ultimately, government tax revenues are determined by the amount of GDP too.
In order to be treading water at debt levels of 100% of GDP, which many European countries are at, governments need their GDP to grow faster than the interest rate on their debt. That’s already a tough challenge these days, with interest rates closer to 5% than 0% two years ago.
But we’ve got ourselves out of this sort of mess before, right?
Well, the tail wind that meant time was on the side of overindebted governments of the past was population growth. It was only a matter of time before enough people were born to make the debt affordable by growing GDP.
But the world’s demographic shift means that populations are not growing as fast through birth rates anymore. That cuts GDP growth. In some places, with declining workforces, it actually shrinks GDP. That’s happened in Japan.
This population decline may seem like bad news on the face of it. But I’m convinced it’s not. A smaller population and workforce presents plenty of challenges. But it’s not like a growing population doesn’t have challenges too.
Consider, for example, that GDP per capita in Japan has been growing perfectly well. While the country’s overall GDP is struggling due to its slowing population growth, the per person share of that GDP has gone up a lot. People are living better even through the country’s economy is barely flatlining since the 90s.
Thus, it is possible for us to get richer in terms of GDP even as the total amount of GDP falls and the population falls.
However, there is one huge fly in this ointment. The same positive angle does not apply to debt.
If the population of a county without any government debt halves, but its GDP only goes down by a quarter, then its GDP per person has still gone up substantially. No problem.
But if Japan’s population halves and it’s GDP goes down by a quarter, then the debt to GDP ratio would explode out of control even further. It would cause a debt crisis, at some point, because the fewer taxpayers could not afford the debt.
Thus, debt is the crucial challenge of declining demographics.
And that is why overindebted governments around the world are letting in immigrants at such a rapid rate — to goose their GDP relative to their debt. They are trying to bring their debt levels back down to levels which are sustainable. And they need to do it fast, to prevent a sovereign debt crisis.
This is, in fact, the same reason that’s behind our inflationary spike. Central bankers and politicians engineered the inflation we saw in order to offset the same challenge — too much debt. I discussed that last week.
My real point is that governments and central bankers are desperately managing economies with the primary goal of dealing with too much debt. That is why they are pursuing deliberate policies that are so politically unpopular and so financially destructive for you. Whether it’s immigration or inflation, too much debt is the causation.
Unfortunately, it takes many years or even decades of inflationary cycles and demographic growth to bring vast debt levels under control. So this is only the beginning of unpopular policies pursued to keep sovereign debt from getting dangerous.
The next phase will likely feature capital controls to prevent money from going overseas or escaping the government bond market. And then the immigrants may even find it hard to leave…
Regards,
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Nick Hubble,
Editor, Fat Tail Daily
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