Construction workers build an apartment building in Bethesda, Maryland, on January 18, 2023.
Saul Loeb | Afp | Getty Images
Demography is destiny, or at least many economists believe it to be true.
The concept began with Thomas Robert Malthus, an 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 main fear eventually proved wrong, that population would outstrip available food supplies, and hence poverty and hunger.
Fortunately, Malthus never anticipated the improvement in agricultural technology and his forecasts turned out to be horribly off, helping to give economics one of its least desirable descriptions… “the dismal science”.
Regardless, demographic trends are proving to be a threat to economic growth today, especially in domestic labor markets where The Federal Reserve struggled for months.
That’s the Fed’s concern “tight” labor markets they are fanning the fires of inflation and forcing the Fed to keep raising rates and holding them longer to avoid a 1970s-style spiral in wages and prices.
Like Malthus, the Fed is misguided in this regard.
Labor markets are tight not because of an overheating economy, but because of a literal lack of people to fill the workforce.
Only recently did Federal Reserve officials begrudgingly acknowledge this.
The chairman of the Fed Jerome Powellhe recently noted that about half a million people who tragically (and in some cases needlessly….my words) died from Covid were among the working age population, adding that roughly 3.5 million Americans are missing from the workforce.
Two million left from the early retirement lawsuit, another 1 million came from the drop in immigration and the previously mentioned increase in Covid-related deaths.
Other data support the view that labor market trends have eased as between two million and four million Americans are dealing with so-called long-Covid, which may prevent them from being able to secure full-time employment.
The roughly two million women who left the workplace to oversee the pandemic-related distance learning required of their children may not have fully returned to work because of high childcare costs.
Looking ahead, without any immediate return of these workers, labor markets are bound to remain tight, and higher interest rates from the Fed will do little to restore the missing labor supply.
Fed Vice Chair Lael Brainard he also acknowledged the issue on Thursdaysuggesting that a 1970s-style wage/price spiral was unlikely given the differences in the factors driving wage growth then versus now.
In the 1970s, the workforce was far more unionized. The annual raise was a contractual obligation, as was an inflation-adjusted wage increase, over and above previously planned increases.
That is simply not the case today. Nor will it continue because the US population, like much of the developed world, is growing more slowly than at any time in US history.
In 2021, the US population grew by 0.1%, the slowest rate in US history! The notion among some economists that increasing unemployment to ease wage pressures seems absurd against the backdrop of America’s demographic reality.
Destroying a village to save it, a residual war strategy, is effectively what these economists are calling for.
By raising the unemployment rate, currently employed workers will lose decent-wage jobs only to return to the same jobs at lower wages after the recession.
That’s about as misguided a policy prescription as I’ve heard in 39 years of covering economics.
In a sense, he is Malthus in reverse.
While immigration appears to be picking up again, it is not growing fast enough to rebalance U.S. labor markets, according to a Goldman Sachs study this week.
The U.S. birth rate has fallen to 1.6 births per family. The necessary rate of population replacement requires each newly formed family to produce just over two children to simply maintain the population, and that, simply put, is not happening.
Life expectancy has fallen for two years in a row for the first time in decades due to deaths from Covid and the opioid crisis.
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 create faster economic growth. Labor force growth + productivity growth = economic growth.
This should not be a political issue, even though more than the funding of Social Security and Health Care, immigration has now become the third rung of American political discourse.
It’s simple math. If we can’t produce enough people organically, we have to get them… at all skill levels.
Every American industry struggles to find and retain talent.
At a very high level of skilled labor, there are 85,000 H1b visas available against 450,000 applicants.
But we also need teachers, nurses, paramedics of all kinds, truck drivers, construction workers, hospitality and agricultural workers.
The Fed cannot print people, nor can it solve this problem.
The Fed, wary of being accused of being too political, has refused to call on Congress to enact comprehensive immigration reform, increase or lift immigration restrictions altogether.
This is a policy fix that is required.
Unless or until the Fed makes a much bolder case for alternative policy solutions, their blunt instrument higher rates will be the only “solution” to the problem.
However, like Malthus, the Fed is making bad demographics worse by not boldly and clearly identifying a fix, and remains part of the problem, not part of the solution.
Malthus would have been proud in a strange way.
— Ron Insana is a CNBC contributor and senior advisor at Schroders.