Construction workers build a residential house in Bethesda, Maryland, January 18, 2023.
Saul Loeb | Afp | Getty Images
Demography is destiny, or at least many economists believe that to be true.
That concept began with Thomas Robert Malthus, the 18th century British economist and demographer, who believed that overpopulation would lead to starvation and poverty if the world and Britain, more specifically, did not control population growth.
His chief worry ultimately proved wrong, that the population would outstrip the available supply of food, hence poverty and starvation.
Happily, Malthus never accounted for improvements in agricultural technology and his forecasts proved terribly off the mark, helping to give economics one of its least desirable descriptions … “the dismal science.”
Malthus notwithstanding, demographic trends today are proving to be a threat to economic growth, especially in domestic labor markets, over which the Federal Reserve has fretted for months.
The Fed’s worry is that “tight” labor markets are fanning the fires of inflation and forcing the Fed to continue raising rates and keep them higher for longer to avoid a 1970s-style wage/price spiral.
Like Malthus, the Fed is misguided in this regard.
A question of labor
Labor markets are not tight because of an overheating economy but, instead, because of a very literal shortage of people to fill the labor force.
Only recently have Federal Reserve officials grudgingly acknowledged this.
Fed Chairman Jerome Powell, recently noted that about a half-million folks who tragically (and in some cases, needlessly …. my words) died of Covid were among the working age population, adding that there are roughly 3.5 million Americans missing from the labor force.
Two million left the work force sue to early retirement, another 1 million came from a decline in immigration and that previously mentioned surge in Covid-related deaths.
Other data support the notion that labor market trends have shrunk in size as two million to four million Americans are dealing with so-called long-Covid, which may be keeping them from being up to the task of gaining full-time employment.
Some two million women who left the workplace to oversee pandemic-related distance learning that was required of their children may not have fully returned to work, owing to the high cost of childcare.
Looking forward, absent any immediate return of those workers, labor markets are bound to remain tight and higher interest rates from the Fed will do nothing to restore the missing supply of labor.
Fed Vice Chair Lael Brainard on Thursday also recognized this issue, suggesting that a 1970’s-style wage/price spiral was unlikely given the differences in the factors that pushed up wages then versus now.
In the 1970s, the labor force was far more heavily unionized. Annual raises were a contractual obligation, as were inflation-adjusted increases in wages, on top of previously planned raises.
That is simply not the case today. Nor will it be going forward, as the U.S. population, as is true with much of the developed world, is growing more slowly than at any time in U.S. history.
In 2021, the U.S. population grew by 0.1%, the slowest pace in U.S. history! The notion put forth by some economists that pushing up unemployment to relieve wage pressures seems absurd against the backdrop of America’s demographic realities.
Destroying the village to save it, a vestigial war strategy, is effectively what these economists are calling for.
By raising the unemployment rate, currently employed workers will lose their jobs at decent wages, only to come back, after a recession, to those self-same jobs at lower wages.
That is about as misguided a policy prescription I have ever heard of in 39 years of covering economics.
In a sense, it’s Malthus in reverse.
While immigration, according to a study from Goldman Sachs this week, appears to be rebounding, it is not growing quickly enough to restore equilibrium to U.S. labor markets.
The U.S. birth rate has fallen to 1.6 children born per family. The necessary population replacement rate requires that every new family formed needs to produce just over two children to simply maintain the population, and that, simply put, is just not happening.
Life expectancy, owing to Covid deaths and the opioid crisis has declined for two consecutive years, the first time that has happened in decades.
We need more people
What we need today is what Malthus feared most over 300 years ago: a population explosion.
We know we can feed more people, but we need even more incoming individuals to replenish the workforce and produce more rapid economic growth. Labor force growth + productivity growth = economic growth.
This should not be a political issue, even though, more than Social Security and Medicare funding, immigration has now become the third rail of American political discourse.
It’s simple math. If we can’t produce enough people organically, we must acquire them … at all skill levels.
Every American industry is struggling to find and retain talent.
At the very high end of the skilled labor force, there are 85,000 H1b visas available versus 450,000 applicants.
But we also need teachers, nurses, healthcare workers of all kinds, truck drivers, construction workers, hospitality workers and agricultural laborers.
The Fed can’t print people, nor can it solve this problem.
The Fed, fearing claims of it being too political, refuses to call on Congress to enact comprehensive immigration reform, increase, or abolish altogether, immigration restrictions.
This is the policy fix that is required.
Unless, or until, the Fed makes a much bolder case for alternative policy solutions, the blunt instrument of higher rates will be the only “solution” to the problem.
Like Malthus, however, the Fed is making a bad demographic situation worse by not boldly and clearly identifying the fix and remains part of the problem, but not part of the solution.
In a strange way, Malthus would be proud.
— Ron Insana is a CNBC contributor and a senior advisor at Schroders.
