Ron Insana says the solution to inflation is more workers

Construction workers construct an apartment building in Bethesda, Maryland, January 18, 2023.

Saul Loeb | AFP | Getty Images

Demography is destiny, or at least that’s what many economists believe.

This concept began with Thomas Robert Malthus, the 18th-century British economist and demographer, who believed that if the world, and Britain in particular, did not control population growth, overpopulation would lead to hunger and poverty.

His main concern was ultimately proven wrong, that the population would exceed the available food supply, leading to poverty and hunger.

Fortunately, Malthus never accounted for improvements in agricultural technology, and his forecasts proved horribly wrong, helping to give economics one of its least desirable descriptions… “the grim science.”

Malthus notwithstanding, demographic trends today are proving to be a threat to economic growth, particularly in domestic labor markets, which the Federal Reserve has worried about for months.

The Fed’s concern is that “tight” labor markets will fuel inflation, forcing the Fed to keep raising interest rates and keeping them higher longer to avoid a 1970s-style wage-price spiral.

Like Malthus, the Fed is misguided in this regard.

A matter of work

Summers: The

Looking ahead, without these workers returning immediately, labor markets are bound to remain tight, and higher Fed interest rates will do nothing to restore the labor shortage.

Fed Vice Chair Lael Brainard also acknowledged this issue on Thursday, suggesting that a 1970s-style wage-price spiral is unlikely given the disparity in the factors driving wages then and now.

In the 1970s the workforce was far more unionised. Annual pay increases were a contractual obligation, as were inflation-adjusted pay increases on top of previously planned increases.

That’s just not the case today. Nor will it continue as the US population, like much of the developed world, is growing at a slower rate than at any time in US history.

In 2021, the US population grew by 0.1%, the slowest pace in US history! The idea put forward by some economists of increasing unemployment in order to reduce wage pressures seems absurd in the context of America’s demographic reality.

Destroying the village to save it, a stunted war strategy, is basically what these economists are asking for.

By raising the unemployment rate, currently employed workers will lose their decent-wage jobs only to return to the same jobs at lower wages after a recession.

That’s about the most misguided political recipe I’ve ever heard of in 39 years of business reporting.

In a way, it’s Malthus in reverse.

While immigration appears to be picking up this week, according to a Goldman Sachs study, it’s not growing fast enough to restore balance to US job markets.

The US birth rate has fallen to 1.6 children per family. The necessary population replacement rate requires that each newly formed family must father a little over two children just to maintain the population, and that just doesn’t happen.

Life expectancy has fallen for two straight years, the first time in decades, due to Covid deaths and the opioid crisis.

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 more immigrants to replenish the workforce and achieve faster economic growth. Labor force growth + productivity growth = economic growth.

This shouldn’t be a political issue, though immigration has now become the third pillar of American political discourse, ahead of Social Security and Medicare funding.

It’s simple math. If we can’t produce enough people organically, we need to recruit them…at all skill levels.

Every American industry struggles to find and retain talent.

At the high end of the skilled workforce, there are 85,000 H1b visas available versus 450,000 applicants.

Gibbs: We're fighting inflation fears versus recession fears

But we also need teachers, nurses, health workers of all kinds, truck drivers, construction workers, hospitality workers and farm workers.

The Fed cannot print people nor solve this problem.

The Fed is refusing to ask Congress to enact sweeping immigration reform, increase or remove immigration restrictions altogether, fearing accusations that it is being too political.

This is the required policy fix.

Unless, or until the Fed makes a much bolder plea for alternative policy solutions, the outright instrument of higher rates will be the only “solution” to the problem.

Like Malthus, however, the Fed is compounding a bad demographic by not boldly and clearly identifying the solution, and remains part of the problem, not part of the solution.

In a strange way, Malthus would be proud.

Ron Insana is a CNBC contributor and Senior Advisor at Schroders. Ron Insana says the solution to inflation is more workers

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