We’re not in a population trap, we’re in an investment desert

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I see we are having one of our periodic panic attacks over immigration again.

Admittedly there is some entertainment value in it, notably the sight of Liberal cabinet ministers professing themselves shocked, shocked at the state of immigration policy in this country.

“It’s really a system that has gotten out of control,” Immigration Minister Marc Miller has charged. Somebody should really look at capping the number of international students entering the country, he feels, as “that volume is disconcerting.”

For his part, former immigration minister and now-Housing Minister Sean Fraser has endorsed the idea of linking the number of immigrants admitted each year to the number of housing starts. If only he had some contacts inside the government.

If Liberal ministers have lately become critics of Liberal immigration policy, it may be because they now agree with those who blame current levels of immigration for everything from high housing prices to falling per capita GDP to health care wait times to inflation.

Or it may be because blaming immigration deflects attention from the contribution other government policies have made to high housing prices, low productivity, etc. Unravelling the many ways federal, provincial and municipal governments have tied housing construction in knots, or discouraged capital investment, is hard work, and wins you no friends. Whereas all it takes to get out in front of the “too many people” parade is a certain absence of shame.

Is the problem too many people? Or is it too little housing or investment? Immigration of permanent residents, we should note, is not particularly high: even at next year’s target of 500,000, it implies population growth of 1.5 per cent. That’s about our post-1945 average.

On the other hand there are legitimate issues surrounding the influx of temporary workers and international students. The numbers are far greater – in excess of 800,000 last year – and seem to have rather taken the government by surprise. Their tenuous status makes both groups vulnerable to exploitation; students, moreover, have housing needs that are not easily filled by the market.

But the broader proposition – that high housing prices or low productivity can be blamed on the number of people coming into the country – is too simple. Yes, other things being equal, more people equals more demand for housing equals higher prices, just as, other things being equal, more workers equals less capital per worker equals lower productivity. But other things are not necessarily equal.

The notion, in particular, that we are in a “population trap,” as an inflammatory new report by two economists at the National Bank of Canada claims, in which “no increase in living standards is possible, because population is growing so fast that all available savings are needed to maintain the existing capital-labour ratio,” requires that we believe the supply of savings and therefore investment is essentially fixed: “all available.”

This is neo-Malthusian nonsense. Even if the level of domestic savings were fixed, which it is not, it can always be supplemented by foreign savings. The willingness to save and invest is not set in stone; it responds, among other things, to changes in policy. Canada has for many years done everything it can to penalize, obstruct and otherwise discourage investment, from high marginal tax rates to intrusive regulation to arbitrary and capricious foreign investment controls.

The OECD tracks investment – gross fixed capital formation – across its 38 member states plus nine others. From 2011 to 2015, Canada’s performance was merely awful: 37th out of the 47. From 2015 to 2023, it was appalling: 44th, ahead of only South Africa, Mexico and Japan. That’s not in per-capita terms. That’s total investment.

If, therefore, per-capita growth has been similarly lagging, it has much more to do with a shortage of capital than a surplus of labour. The problem isn’t that our population is growing at 1.5 per cent per annum. The problem is that our economy won’t grow any faster than that.

Ah, but perhaps the increase in population caused the collapse in business investment. Instead of investing in new plants and equipment, businesses simply took on more labour, what with there being so much of it standing about and all.

But again this ignores the policy environment. Whether a firm decides to add capital or labour is not governed only by the supply of each, but by their relative costs and benefits. Governments have done much to make it costlier to hire labour over the years, in the form of mandated benefits, severance laws and the like. If businesses still prefer to make new hires than invest, it may be because the cost of capital has become similarly prohibitive.

All that rapid population growth has done is to make the cost of bad investment and housing policies more explicit. Slowing immigration is a band-aid response. The solution is to stop the bleeding.

 

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