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When the economy is growing rapidly, companies and consumers have more money to spend. The stronger demand for goods and services can cause prices to rise and inflation to spike. Inflation is not good. The federal government has two levers it can use to slow or stimulate economic activity: taxes and interest rates. When inflation gets too high, like it is today, the government will increase interest rates to slow the demand for goods and services. People buy fewer cars, homes, and luxury items when interest rates are higher. When demand is reduced, prices tend to stabilize, which slows inflation. However, even the smartest economists in the world know it is extremely difficult to create the perfect balance of supply and demand for the economy. If demand slows too much, the economy can slip into a recession causing all sorts of other risks, including massive layoffs and high unemployment. However, today we have zero economic growth and high inflation. How is this possible? Inflation today is being driven by three primary factors; oil prices due to the war in Ukraine, supply chain issues around the world caused by COVID, and labor shortages due to our counterproductive immigration policies. The first two are anomalies, but labor shortages are a systemic problem in the U.S. that won’t go away unless something significant is done to address it.
The last time the U.S. had inflation this high Ronald Reagan was president. FHA mortgage rates at that time were in excess of 18%…yes, you read that correctly. Whether you like Reagan or not, he understood that one of the ways you curb inflation without halting economic growth is by increasing the number of people in the workforce. Reagan also knew that the only way to accomplish this in a reasonable amount of time was through immigration. Reagan and his Republican successor George H.W. Bush overhauled our immigration policies, including providing amnesty for 3 million undocumented immigrants and paving the way for 20 million additional immigrants who entered the country over a twenty-year span. Believe it or not, Republicans were once the pro-business and pro-immigrant party in America.
Reagan’s immigration policies worked. They helped to curb inflation and they set the country up for the longest stretch of economic growth in history. Unfortunately, today’s narrative around immigration rarely frames it as an economic issue – which it is. Instead, the country has become blinded by culture wars and fear-mongering politicians. Last week, 53 migrants died of heat and dehydration in the back of a semi-truck in South Texas. The worst immigration-related tragedy in U.S. history – and hardly anyone noticed. Regardless of your politics, you’d have to be a monster not to have compassion for these people who were only seeking a better life. Make no mistake, they would not have entered the country if there wasn’t someone here ready to hire them. Illegal immigration is bad for everyone involved, especially the immigrants themselves, but it is indicative of a broken system and a dysfunctional government. People all over the world want to come to the United States because we have the strongest economy in the world, but that may not be the case for long. Those of us who were around in the eighties remember when everyone thought Japan would surpass the U.S. as the leader of the global economy. Obviously, that didn’t happen…and it didn’t happen for one primary reason: Japan has some of the strictest immigration policies in the world, and with no job growth for nearly three decades, the Japanese economy has shrunk.
The current labor-shortage-induced inflation is only the start of our problems if we don’t get our act together. As our population continues to get older, and more people are entering retirement age, the only thing that will keep our social security system from becoming insolvent is immigration. Conversely, more workers in America means long-term economic growth without minimal inflation and more prosperity for the whole country. It’s not rocket science.