Opinion by David James Herbert & Alexander William Salter | The Hill | AUG. 4, 2022 | Photo by Jose Luis Magana
Record-high inflation has wreaked havoc on an economy already struggling to recover from COVID-19. The Federal Reserve is aggressively hiking interest rates, but it’s too little, too late. When too much money chases too few goods, rising prices are inevitable. Since the start of the pandemic, the monetary base has risen 60 percent and the M2 money supply 40 percent, outpacing the uncertainty-induced spike in liquidity demand. If we want to tame inflation, we need to stop running the printing presses. But we also need bold supply-side reforms.
It’s time to liberalize immigration policy. Making it easier for people to come here and work increases the availability of labor. That would boost the goods supply relative to the money supply. While it’s not a panacea, immigration can ease pricing pressures. Making green cards, visas and even citizenship easier to obtain makes economic sense, and it offers humanitarian benefits as well.
In the long run, living standards depend on supply-side factors. These include the amount of labor and capital, technological progress and a supportive regulatory environment. The White House, Congress and the Federal Reserve have focused too much on the demand side. While demand stimulus can temporarily cushion falling incomes and wealth, it isn’t sustainable. Policymakers quickly run into the fundamental constraint: how much the economy can produce.
Augmenting demand leads to higher prices, but augmenting supply leads to lower prices. The secret to broad-based prosperity is making goods and services more abundant, and therefore cheaper. “Supply-side economics” isn’t fundamentally about tax cuts, and there’s no reason conservatives should have a monopoly on it. Liberals can profit from this agenda, too. Immigration reform is the place to start.
Many people worry that increased immigration will lower current workers’ wages, already eroding because of inflation. While it’s true prices are rising faster than wages, immigration won’t make things worse. In fact, it could make things better. Most studies find no effect on wages for current workers. Some find wages increasing as a result of immigration. After all, immigrant labor complements existing domestic labor, raising everyone’s productivity. When productivity goes up, so do wages.
If more immigration won’t lower wages, and might even raise them, how can it help whip inflation? Material abundance is the key. Wages are an important price – the price of rented labor – but still just one price. Curbing inflation means slowing down price growth across the whole economy. If liberalizing immigration policy results in a temporary surge of workers, that will stabilize the bottom-out point of dollar depreciation. We could even get a durable inflation slowdown if the worker boost is long-lived, buttressing productivity over many years. Whether we get a one-time benefit or a flow of benefits depends on immigrants’ decisions to live and work here. Either result is welcome. With prices rising 9 percent per year, we shouldn’t be picky.
Despite falling production and rising prices, the unemployment rate is still very low at about 3.6 percent. Employers consistently report having great difficulty finding workers to fill vacant openings. The Bureau of Labor Statistics reports that in May, there were 11.25 million job openings and a total of 5.95 million people unemployed. There are almost 1.9 job openings for every unemployed person, up from 1.7 in March, when Federal Reserve Chairman Jerome Powell described labor markets as “tight to an unhealthy level.” Burnout afflicts many workers. Streamlining the immigration process so that new workers could quickly fill vacancies would reduce the degree to which current laborers are overworked.
Finally, increased immigration comes with humanitarian benefits. Many millions of intelligent, hardworking people around the world are struggling to make ends meet under oppressive regimes and severely dysfunctional economies. In fact, as Branko Milanovic describes, over 80 percent of global income inequality is determined by a person’s country of origin. Granting these people easier access to American labor markets would remove them from the immediate dangers they face while also alleviating extreme poverty. Apart from economic considerations, basic human dignity impels us to welcome those seeking better lives.
Handing out green pieces of paper canmake us wealthier, so long as they’re permanent resident cards and not dollars. Taming inflation means giving supply every possible chance to outpace demand. If we’re serious about restoring an inclusive and prosperous economy, we should welcome more immigrants.
