If the Economic Indicators Are Good, Why Aren’t Voters Feeling It?

Hint: Look to Biden’s border policies, which even the Federal Reserve is lauding, but beware the hangover after the sugar rush

By Andrew R. Arthur on April 8, 2024

A recent CNN article headlined “Why is there nostalgia for the Trump economy in the battleground states?” begins: “Voters and economists seem to have wildly different views of the US economy, a disconnect that’s hurting President Joe Biden in the key states that will decide the 2024 election.” Objectively, economic indicators are good, so why aren’t voters feeling it? The president’s border policies have a lot to do with the figures, as even the chairman of the Federal Reserve has admitted, but the short-term improvements — like a “sugar rush” — are likely to come with a nasty hangover.

“Supply Shocks” and “Cost-Push Inflation”. In 2019, the average annual inflation rate was 1.9 percent, which fell to 1.2 percent with the Covid-19 pandemic in 2020 before jumping to 8 percent in 2022. It has gradually declined since then to 4.1 percent in 2023 and sat at 3.2 percent in February.

I was a child during the “stagflation” — a combination of a stagnant economy, high unemployment, and runaway inflation — that came to define the late 1970s and that eventually tanked the Carter administration.

President Carter and his successor, Ronald Reagan, managed to tame inflation and put the economy on a sound footing for some 40 years with the assistance of Paul Volker, then-chair of the Federal Reserve, the U.S. central bank. Volker tightened the supply of money and raised interest rates (which reached 20 percent in 1980), driving inflation down and the unemployment rate up to 10.2 percent in December 1982 before the economy finally found its footing.

There were a lot of reasons for stagflation, including what were considered at the time to be huge federal deficits. Basically, the U.S. government was printing money to pay its bills, devaluing the currency.

Another major factor, however, was “oil shocks”. War in the Middle East (Israel in the early 1970s and Iran in 1979) led to oil shortages, and the price of a barrel of crude rose from $4.31 in December 1973 ($20.72 in today’s dollars) to $10.11 two months later ($55.09 in 2024), and then to $39.50 in July 1980 (roughly $150 today).

That drove the price of gasoline up, and when your 1980 Oldsmobile Cutlass (the most popular car that year) was getting an optimistic 17 miles to the gallon in the city, the costs of driving — and everything associated with transportation — quickly rose.

Overly simplistically, inflation occurs when too much money chases too few goods, and those oil shocks were a prime example of what’s referred to as “cost-push inflation”, which, as the Fed explains, occurs when “the impetus for price increases comes from a disruption to supply”.

The Post-Covid-19 Inflation. The Covid-19 pandemic initially drove costs down, as people stuck at home engaged in less commercial activity, hence that 1.2 percent inflation rate in 2020.

The Bureau of Labor Statistics explains in its review of a paper presented by former Fed Chair Ben Bernanke and Olivier Blanchard, however, that:

as labor markets began to overheat in 2022, with unsustainable employment increases, a high ratio of job openings to unemployed workers, and low levels of quits, labor market tightness increasingly became the main cause of the persistently high inflation rates.

In a recent op-ed, my colleague Steven Camarota noted an interesting — and troubling — phenomenon: In the four-year period between the fourth quarter of 2019 (pre-Covid) and the fourth quarter of 2024 (post-pandemic), 183,000 fewer U.S.-born workers were in the labor market, while the number of employed immigrants rose by 2.9 million.

“Put simply, compared to 2019, all the net job growth has gone to immigrants.” As Camarota explained elsewhere, however, that decline is not because the number of U.S.-born workers has declined, but rather because the “labor force participation rate” for U.S.-born men aged 18 to 64 without a bachelor’s degree fell from 76.3 percent in Q4 2019 to 75.6 percent in Q4 2023.

That followed a decline in the labor force participation rate among that cohort from the 1960s — when more than 90 percent were working — through 2000 (82.6 percent) and 2006 (80.5 percent).

And, according to Camarota: “At 66.4 percent, the labor force participation rate of U.S.-born women (18 to 64) without a bachelor’s in the fourth quarter of 2023 has returned to the 2019 level but is still well below the 70.7 percent in 2000.”

Those U.S.-born workers who have left the job force should have had the same effect on inflation as the cut-off in crude did in the mid-1970s; that is, it should have driven costs up between 2019 and 2023 as the labor supply dropped.

Except the labor supply didn’t drop, because so many alien workers have entered the United States — legally and more significantly otherwise — in that period that the supply shock has been blunted.

“Immigration Helps US Jobs Grow Faster Than Powell’s Speed Limit”. Which brings me to an April 4 article in Bloomberg captioned “Immigration Helps US Jobs Grow Faster Than Powell’s Speed Limit”. The “Powell” in question is current Fed Chair Jerome Powell, and the article focuses on remarks he made at Stanford University on Wednesday. Here’s the key takeaway from that piece:

Migrants have increased labor supply and typically fill lower-paying jobs, keeping aggregate wage measures tame.

Economists started rethinking their payrolls forecasts after the Congressional Budget Office [CBO] more than doubled its estimate of immigration last year to 3.3 million people. It expects a similar-sized influx in 2024 and estimated in a February report that the rise in migrants will boost the economy by $7 trillion over the next decade.

The increase stems mainly from people entering the US illegally and from those released by customs officials with humanitarian parole or with a notice to appear before an immigration judge. Eventually, many of those migrants join the labor force.

Speaking at Stanford University on Wednesday, Powell said the increased inflow boosted US economic growth last year and helped to loosen a stretched labor market, while stressing that he was not commenting on immigration policy. [Emphasis added.]

The CBO report referenced is captioned “The Demographic Outlook: 2024 to 2054” and it acknowledges comments the office received from both Camarota and me in its preparation (while adding “The assistance of external reviewers implies no responsibility for the final product; that responsibility rests solely with CBO,” which is patently true).

“Keeping aggregate wage measures tame” is a euphemism in this context for “keeping prices low”, which is also patently true; low-skilled workers taking low-paying entry-level jobs have moderated the costs of goods — and especially services — for consumers.

Driving down the wages of American workers — both U.S.-born and legal immigrants — may not have been the intent of the president’s lax immigration-enforcement policies (a desire to “advance[e] equity for all, including people of color and others who have been historically underserved, marginalized, and adversely affected by persistent poverty and inequality” is, as I’ve explained elsewhere), but it has been the result.

"We Wanted Workers, but We Got People Instead." Playwright and novelist Max Frisch is quoted as stating, with respect to guestworkers in his native Switzerland: “We wanted workers, but we got people instead.” That’s an important point to keep in mind in considering the deflationary benefits of this increased migrant labor flow.

It’s curious that neither Bloomberg nor Chairman Powell ever mentioned the costs — municipal and otherwise — that this “increased flow” of migrants has foisted upon communities across the United States, but they are real, palpable, and undeniable.

On the one hand, goods and services consumers purchase are priced lower than they would have otherwise been, which is a positive. On the other hand, however, those migrants aren’t simply “units of labor”; they are people, and have the same need for housing, education, health care, and sustenance that the rest of us have. And they impose the same or greater demands on public services.

That’s why you hear elected officials like New York City Mayor Eric Adams (D) demanding federal aid to care for his burgeoning migrant population and for the administration to implement a “decompression strategy” to redistribute those migrants — instead of dealing with the migrant crisis by closing the border to illegal migration.

You can’t run a “city that never sleeps” in one of the most expensive metropolitan areas in the world without a load of willing labor to do dirty jobs for low wages — so long as everybody else who pays federal taxes is helping foot the bill for those workers’ shelter, food, medical care, and schooling.

As one advocate for such a decompression strategy explains:

We take refugees from abroad, they come in and we — the federal government — decide where they're going to settle. ... The federal government should decide where they go — not [Texas Gov. Greg] Abbott, not buses. And the federal government should make the decision based on: do they have any family they can live with, because family first. If they don't have family, then we send them to the parts of the country where there is need for workers and where the housing is cheap — not cheap, but inexpensive. [Emphasis added.]

There’s a lot of cold, hard economics in that proposal, but then economics is referred to as the “dismal science” for a reason. Do migrants living in Manhattan’s Roosevelt Hotel want to go to Oklahoma? I’m familiar with both, and each has its charms, but I know which I’d choose.

That aside, the crucial question is how quickly those new “needed workers” living in “inexpensive housing” will become self-sufficient taxpaying members of the community.

I’d say that’s the elephant in the room, but the phrase generally refers to something everybody sees and is aware of, but nobody wants to talk about. Nothing suggests that Chairman Powell or anyone else in the administration is even thinking about the long-term costs of this scheme.

Labor Productivity. “Human capital” — that is a reliable supply of willing workers — is crucial to any economy, but it’s just one of three elements in “labor productivity” (i.e. “the hourly output of a country's economy”), the other two being “saving and investment in physical capital” and “new technology”.

For the “real Gross Domestic Product” (GDP) of an economy to increase, the hourly output of labor must grow, which means more investment in physical capital (the tools to do the job, be it a hammer or a computer) and/or an increase in new technology.

Capitalists being capitalists, if they can squeeze healthy profits out of a steady and growing supply of cheap labor, their interest in investing in either new physical capital or expensive but novel technology will be limited. “Necessity is the mother of invention” is a 500-hundred-year-old proverb for a reason.

Where there’s no “necessity”, however, there are fewer inventions — and no increased productivity. Jerome Powell likely knows that as well as anyone, but for the moment he appears more interested in being the hero who cuts interest rates than the scold forcing business owners to invest in innovation.

California’s $20 Minimum Wage. About one-in-three Americans (including me) got their first jobs in restaurants, for a good reason — they’re entry-level positions that require few if any starting skills. And about one-tenth of the U.S. workforce remains employed there, including — from my more than three decades of immigration experience — a significant number of recent immigrants.

The problem, of course, is that the restaurant industry is labor-intensive, and when the labor pool is limited, owners must pay higher wages to entice and keep workers or invest in innovations.

As noted, however, the administration’s border policies have expanded the number of low-skilled workers. That has likely provided some relief to an industry hard hit by the pandemic, but it has also driven down the ability of the already employed to demand higher wages.

The state of California has responded to that latter problem by imposing a $20-per-hour minimum wage on fast-food workers, which has created its own set of problems. The whole idea is that fast food is also cheap food, and there’s not a lot of space for such restaurants to pass the increase onto consumers.

California already has the highest unemployment rate in the nation, at 5.3 percent, and this mandate won’t drive that rate down except by pushing workers out of the state’s workforce. There’s little need for a minimum wage when the pool of human capital is low and workers can negotiate — but as the foregoing shows, the border is currently flooding that pool.

“A Host of Profound Social Pathologies”. Some may favor a massive influx of new workers coming here to do low-level jobs, particularly when those jobs involve strenuous labor for low wages. “Jobs Americans won’t do” has almost become a trope.

As Camarota has noted, however:

[T]he rise in non-work is associated with a host of profound social pathologies, from crime and social isolation to overdose deaths and welfare dependency. At a time when many businesses struggle to find workers, it may seem desirable to simply use immigration to fill jobs. But continuing to bring in millions of less-educated immigrants effectively allows business interests and the state to ignore the huge deterioration in labor-force participation and all the accompanying social problems that large-scale immigration creates among poor Americans of all races and social backgrounds.

Those are not purely theoretical concerns; I’ve seen them both in my erstwhile hometown of Baltimore and my current residence in the Piedmont of North Carolina. When the biggest industries shut down — steel mills in “Charm City”, textile ones here — crime, drug abuse, and despondency followed in their wake. The rich are still rich, but the poor quickly lose hope in any sort of future.

While I’ve studied economics, I’m no economist, so take all of this with a grain of salt. But an economy that relies on the exploitation (in the economic sense of the word) of poor and often illegal migrant labor is not a healthy one, and increasingly, that’s what American voters are seeing.