Australia Should Be a Failure. Why Isn't It?

this video is sponsored by givewell Australia is one of the most successful economies in the world its citizens enjoy a level of personal wealth that is only matched by four or five other places on the planet all of which that are much smaller Nations overall it's also enjoyed relatively stable economic output maintaining its record of avoiding a recession for more than 30 years that's all great except for the fact that by most logical economic reasoning Australia's economy should be a total failure it's made most of the same mistakes as a lot of other countries around

the world right now that are currently dealing with hyperinflation mass unemployment National bankruptcies and in some cases almost total societal failure but Australia soldiers on and the question is why learning how Australia has managed to avoid catastrophe while making all of the same moves as countries that are faired far worse could teach economists a lot about potentially small differences that resulted in dramatically different outcomes so why is it that Australia should be an economic failure how has it avoided all of its problems is its luck sustainable long long term and finally is there anything that

other countries can learn from Australia's unique approach to economic management have you ever wondered where your donation could have the most impact in 2007 a group of donors had that exact question but when they sort out information from Charities to help them answer this question they instead received cute pictures or unhelpful stories their experience LED them to create give well an organization that would provide rigorous transparent research about the best giving opportunities they found give oil has now spent over 15 years researching charitable organizations and only directs funding to a few of the highest impact

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for most of these economic issues there is another country in much the same position Canada although for most of these problems or opportunities respectively Canada is facing them in a slightly less severe way also a small disclaimer is that I am of course personally from Australia so I would like to believe that our current way of doing things is sustainable although as always just because we want something to be true doesn't mean that it is all right anyway Australia's success stumps a lot of economists because in many ways it has the wealth and prosperity of

an advanced econ economy only with the industries of a developing economy holes and homes make up a concerningly large share of Australia's economic output one of these is a notoriously unstable industry that is at the mercy of global markets trade tensions and the performance of other economies thousands of kilometers away Australia's second largest physical export is coal a crude fossil fuel that most of the world is moving away from as part of efforts to be more environmentally sustainable Australia is also heavily dependent on just one trading partner China which buys over 40% of its exports

now of course Australia is blessed with some of the most abundant natural resources in the world and those resources are split up between a very small population of just under 26 million people so unlike a country like the USA Australia could live very comfortably off these revenues at least in theory the problem with selling unimproved natural resources straight to international trading partners is that they are very profitable and don't require that much local production now that might sound like a good thing and to the companies extracting these resources it is but but to the country

itself it can cause some major problems now we've explored the issue of the resource curse or Dutch disease in dozens of videos on this channel before and I don't want to repeat too much for regular viewers so in brief the issue specifically relevant to Australia is that it has been very hard to turn those natural resources into a genuine Improvement in the National economy exports are counted as a component of output or GDP alongside consumption investment and government spending but just because shipping dirt or lumps of coal overseas might make economic output figures look good

it doesn't necessarily mean that it's doing any good for the regular economic participants in the country most major mining operations in Australia are incredibly remote and employ a relatively small Workforce of people that are transported to these locations by mining companies and then transported back out these are so-called fly in fly out or fifo workers while these workers are on site in the mines they have most things from food to accommodation provided for them by the company they work for what this does is effectively separate one of these the most lucrative Industries in the country

from any type of interaction with the rest of the economy something like the finance or technology industry centered around major cities in the USA Western Europe and Asia are also very lucrative but they help to contribute to the local economy because everybody employed in these jobs will go out shopping or go out for dinner or really do anything to contribute to the local economy around them this recirculation of money means that even people not directly involved in these major industries can still benefit from them but when the centers of Industry are literally thousands of kilometers

from major population centers it makes it much harder for workers to recirculate their money and even besides that these mines just employ less people to begin with now these issues could be alleviated if the revenues from these mining operations were pushed back into the domestic economy obviously the most direct way to do this would be to tax resource sales and then use the tax revenue to fund various government projects of course regular viewers of the channel already know that the go-to example of this being done effectively is Norway which is another country with a vast

wealth of natural resources and a relatively small population to share them between the Norwegian government has heavily taxed natural resource revenues from private companies and even set up their own State company to generate income directly that money is then put into a giant National savings account called a sovereign wealth fund which invests the money and uses those earnings to fund government services it really is the gold standard in making sure that the resource wealth of a Nation goes to benefit the people of that Nation because unlike a lot of other Industries natural resources won't create

domestic economic activity by themselves now a quick side note is that Australia does technically have a sovereign wealth fund the future fund but that money came from the privatization sale of things like Australia's telecommunications company Telstra it's also only worth about 17th of Norway's Fund in a country with five times as many people because it receives no direct revenues from natural resources unfortunately the Australian government has failed to Levy direct taxes on mining and today a lot of the wealth generated from this industry goes largely to benefit a few extremely wealthy individuals or International resource

companies that send their profits back to their home country foreign cash transfers are not a part of economic output figures so a country can be bleeding money and economists would never know it by looking at GDP alone now of course other Industries like Tech and finance have caused problems as well like massive inequality between wealthy people working in these lucrative jobs and everybody else but that still happens in Australia with mining too fly in fly out workers are paid extremely well and can easily out compete other regular workers for things like housing which is another

major issue in the Australian economy and a handful of well-paid workers are far from the biggest cause of this crippling problem housing and Australia as some of the most expensive in the world which on the surface doesn't really make that much sense the price of housing just like the price of any other good or service is determined by the forces of supply and demand on the supply side Australia has a lot of land it's the sixth largest country in the world by total land mass and on the demand side it just doesn't have that many

people this whole continent is inhabited by fewer people than live in a few major cities around the world now the reason that Australian homes are still unaffordable despite all of this land to share around amongst so few people can teach us just a lot about market dynamics the price of a good like a house might be the function of supply and demand but supply and demand themselves are determined by lots of individual factors Supply in Australia is the easier issue to address yes the country is extremely large but most of it is almost totally uninhabited

desert the vast majority of people live very close to the coast in a small handful of dense cities Sydney and Melbourne mostly which are the ones that rank highly on un affordability scales my own home of Sydney the most expensive city in Australia and second most expensive in the world effectively sits on something of a natural Bowl surrounded by mountains on three sides and the ocean on the fourth so there isn't really that much land available Australians also culturally prefer large freestanding homes which reduces the supply of available land further because these homes take up

more room than apartments or tow houses around major Australian cities this is led to Urban Sproul where people are living further and further away from centers and spending longer driving to work or areas of recreation now in defense of Australian home buying habits a large building industry has grown in the country to take advantage of extreme home prices but new apartment buildings have been plagued by terrible building standards pushed by development companies that just want to quickly flip houses for as big a profit as possible this might sound familiar to a lot of other countries

we've explored before on this channel now that has forced a lot of people that potentially would be willing to buy and live in an apartment back into chasing a limited supply of freestanding homes now on the demand side it's not important just how many people are willing to purchase a good what's arguably even more important is if they are able to Australians on average have very high incomes the country has the highest minimum wage in the world after accounting for exchange rate fluctuations buying houses is also heavily supported by Australian taxation policy which excludes people's

homes from certain taxes if they make a profit on them buying houses as an investment to rent out is even more heavily encouraged because people can ride off expenses like the interest they pay to the bank or even depreciation against their regular income now being able to write off the expense of holding an asset against the income generated by that asset is not unique to Australia most countries around the world have some variation of this rule what is unique to Australia though is that these expenses don't only reduce the income generated by the asset they

reduce any income including the income people get from a job if someone earns $100,000 a year from a job and $20,000 from an investment property but they can show paper expenses for $50,000 on that property they would only pay taxes on $70,000 Australia has some of the highest income taxes in the world as soon as someone earns over the equivalent of $115,000 or $180,000 Australian dollar they pay 45% of every additional dollar they earn there are countries with high minimum tax rates but not many of them start from such a relatively low income and yes

of course $15,000 a year is a lot of money but not necessarily for such an extreme tax rate in one of the wealthiest advanced economies in the world but don't feel too bad for the high earning Australians just yet because very few people really pay these taxes because it's almost considered financially irresponsible to not buy a house claim on paper Financial losses and get it charged a much lower tax rates the tax advantages that homes give Australians have turned them into Investments more than they are a place for people to live unfortunately this has come

at the expense of investment into other areas of the economy like technical Innovation which lags well behind other advanced economies the USA in particular because Australians would rather invest in homes and the country is not as big a market for international Investments overall housing has helped the economy along in the most basic way possible because even terrible new housing developments still employ a lot of skilled workers to build and sell and that's on top of things like infrastructure development that's needed to connect all this urban sprawl with utilities and Roads state governments within Australia also

benefit from this whole system by collecting tax revenues every time a house gets sold which now with such high home prices forms a significant part of their ongoing budgets so Australia is an economy that is just as heavily relied on basic natural resources as economies like Venezuela Russia the DRC Brazil Saudi Arabia and Iran it is also centered a lot of its wealth economic growth and employment around housing speculation and poor quality development something that countries like China are struggling with right now and have already heavily impacted many countries from Sri Lanka to Iceland and

even the mighty USA yet despite making the same mistakes in sometimes even more pronounced ways the Australian economy carries on unaffected that's because Australia's economic system is not about selling rocks or homes it's about selling Australia Australia is one of the most desirable economies in the world world to immigrate to and that's because it is incredibly politically stable it has an extremely high standard of living good weather and a strong culture of diversity Australia is also an English-speaking country which is already a widely spoken language making it easier for people moving from the USA Canada

and well England to live here on top of that English is the world's most spoken second language which means a lot of Highly Educated people from across the world can still speak it fluently enough to live and work in Australia even if it isn't their first language schools in Australia are also well class with top universities ranking alongside or often even exceeding Ivy League schools in the USA or similar institutions in Europe even certain high schools in Australia like James roseth agricultural school will have an international reputation amongst wealthy migrants who want to find a

new home where their children will be well educated education has become one of the most valuable exports for Australia and it pays off in more ways than just the billions of dollars worth of tuition brought into the country every year we have looked at student migration in a lot of videos on this channel before including last time we explored the economy of Australia 2 years ago and that's because where the world's young and educated people end up is going to be one of the most important variables that is going to determine the future of an

increasingly intelligent-based global economy that's on top of the global education industry being massive and very value adding in its own right a student coming from overseas to study is an almost perfect Economic Opportunity for any country when they arrive they're going to bring money with them to boost the local economy as they pay for basic consumer goods and a place to stay as they study they'll be paying tens of thousands of dollars a year in school fees to universities that in turn employer lot of people and conduct a lot of research that can further boost

the economy and when they're done paying all of that money and they graduate the host country in many cases can choose to keep the young freshly qualified worker at the very beginning of their career where they can add value to the economy and pay taxes for the longest possible time in Australia it's not just students coming to make big contributions to the local economy either a lot of already very highly skilled and wealthy people want to make the land down under their home the country cities may be incredibly expensive but that's because they're consistently ranked

as some of the most livable in the world World quality of life metrics in Australia are similar to those of Scandinavian countries but places like Norway Sweden and Denmark as great as they are economically speaking also look like this for most of the Year whereas Australia looks like this these are very real things that don't get seen in economic metrics but are still something that some of the most in demand people from around the world will consider before moving to a new country to start a new life other countries that compete with Australia in terms

of Lifestyle also tend to be quite insular whereas Australia actively encourages migration so long as migrants bring something of value with them either in demand skills a lot of money or at the very least a willingness to work jobs that nobody else in Australia wants to the results speak for themselves Australia plans to bring in 1.5 million migrants over the next 4 years and will have no problem attracting this many people what's more is that most of them will have highly in demand skills will be bringing a lot of money along with them to inject

into the Australian economy or both accommodating people moving to Australia has become one of the biggest industries in Australia and it's also made existing Australian some of the wealthiest people on the planet something like owning a house close to one of the few major Australian cities has made people millions of dollars because again supply for these homes is surprisingly Limited in such a large country and demand grows every year as hundreds of thousands of people try to make the idyllic country their home on a macroeconomic scale this success is a bit of a give and

take on a positive note the industry of just being a really desirable place to visit or live is a remarkably stable thing to build an economy around outside of domestic civil unrest there's not much that's going to make Australia an undesirable place to come as a tourist or as long-term resident however while things might look good for the average Australian that success has not been shared equally output in the country has not grown over the past decade thanks to population growth has gone backwards on a per capita basis the country can continue to operate by

just staying an attractive destination for wealthy and skilled people however wealth growth without production growth and by extension income growth means that it's harder for young Australians that haven't already built up wealth to afford the price of everything in Australia's major cities especially housing like we explored earlier this also means that they do not enjoy the tax breaks the property owners receive so over their lives they end up contributing more while receiving less of course unaffordable housing is not unique to Australia it's just that in other major cities around the world houses are largely result

of opportunities for higher incomes in the USA the most expensive cities are all places where large and highly technical industries that pay their workers incredibly well are situated in Australian cities houses are even more expensive but wages on average are significant ly lower than major Global centers it's not incomes that keep the price high it's largely the demand for the lifestyle the openness to new residents and the tax breaks that houses make possible driving the demand unfortunately for average economic participants in Australia it's hard to pay for a house with a nice coffee shop and

good weather it's this unique combination of factors that has almost made Australia a cautionary tale amongst other developed economies of what can go wrong if they let things like housing grow without controls unfortunately for Australia it may be in a position now where there is no turning back back now everybody knows the line nobody can predict the future least of all economists but Australia is now stuck between a rock and a hard place if it slows down migration to reduce the competition for its existing residents for things like housing then its overinflated Market could destroy

a significant portion of the country's wealth it can keep on bringing more people in but if that doesn't translate to developing more productive Industries outside of building homes and digging holes then while the people who have already invested in Australia are going to do well it's going to get harder for young people to enjoy their high quality of life life which is an economic failure in its own right now we've spoken a lot about immigration and foreign trade in this video and Australia's unique relationship with China is at the center of both of those issues

if you've ever wondered about what it would look like if China went on a rampage and invaded Australia we've made an entire video about exactly that on our geopolitics Channel context matters and you should be able to click to that on your screen right now thanks for watching mate bye