Supply and Demand

 Federal Reserve Chair Jerome Powell's appearance before Congress this week forced our lawmakers to confront directly an odd feature of our economic system that most of them would rather politely ignore: namely, that the most important economic policy decision makers are not themselves, but rather an unelected board of technocrats charged with raising and lowering interest rates. Not only that: but this board is presently engaged in the task of actively trying to tamp down many features of the economy that the rest of us would ordinarily regard as unalloyed goods, and which purely democratic decision making would probably never knowingly sacrifice: a strong labor market, robust wage and jobs growth, etc. 

Now, as bizarre as the Fed system is, it would be infinitely worse not to have a central bank empowered to act independently (history has proved that well enough). And most members of Congress know this. Thus, most senators seem to have felt there was little to be gained from challenging the Fed directly during Powell's testimony. Still, there were a couple lawmakers who reportedly couldn't contain themselves. According to Politico, John Kennedy of Louisiana grilled Powell on whether he was intentionally trying to raise the unemployment rate. Elizabeth Warren, in the most heated exchange of all, asked Powell what he would say to the millions of people the Fed's rate hikes will knowingly drive out of work. 

To all these criticisms, Powell replied that he is not trying to do anyone any harm. He doesn't even want the unemployment rate to rise. He is just "trying to realign supply and demand" in the labor market, in which—according to his view—there are presently too many openings and not enough workers to fill them. This dearth in the labor supply, in turn, he believes, is what's driving up prices. 

And Powell may indeed be correct; the upshot of it still remains that an unelected board is actively working to further economic policies that would probably never be selected by the American people, if they had a more direct say in the matter: working to constrain economic growth, blunt demand for labor, bring down wages, and make borrowing more expensive. This week alone, the Fed's policies have forced a (hopefully mild and transitory) bank run, and fears of more interest rate hikes to come have sent markets into a week-long tailspin. Call it strong medicine if you like, and maybe it is all necessary and unavoidable, but these are not the kind of policies you get from officials who need to worry about the next election. 

This is, as I say, all as it should be. We should thank our stars the Fed is independent, and lawmakers who direct their anger about our current economic plight at the Fed are entirely barking up the wrong tree. The Fed, after all, has only one tool at its disposal: the policy rate. If inflation is going up too rapidly, they can and will use it to slow economic growth. This is the right course of action. None of us would want to live in an economy that experiences 6% or higher inflation every year for many years running. And it is precisely because the policies necessary to avoid this fate are unpopular that we have chosen to take them out of the political process, and leave them to a set of purely administrative functionaries entrusted with setting monetary policy. 

But just because the Fed has only one policy tool, that doesn't mean it's the only tool that anyone has. Congressional leaders have a much wider set of potential strategies at their disposal for influencing economic policy. And if they managed to put a dent in inflation by other means, then the Fed wouldn't have to keep raising rates. And so, instead of badgering Powell and blaming the Fed, senators should be asking themselves what they could be doing better to slow inflation with the tools at their disposal. And there is indeed one very important potential policy solution that no one in Congress seems willing to countenance or touch—a solution that would allow us to achieve balance in the labor market without slowing economic growth: namely, increased immigration. 

Note after all how Fed chair Powell framed the problem. He wasn't trying to raise unemployment, he said. He was just trying to "align" supply with demand. This suggests that the problem could be set about from two different directions. If the labor supply falls short of demand, then the Fed can try to lower demand by raising interest rates. This, indeed, is the only thing the Fed can do, because they have no control over the labor supply. But the problem could also presumably be attacked from the direction of supply. Namely, the government could allow more immigration and thereby increase the labor supply. To do this, however, the Fed is powerless. Blaming and badgering Powell therefore gets us nowhere. Congress and the executive need to take responsibility for delivering the higher levels of immigration that only they can bring about. 

This, however, is precisely what our politicians will not do. The Biden administration is utterly terrified of headlines suggesting they promote immigration levels or have "lost control of the border"—so much so that in recent months they have not only prolonged and doubled down on a Trump administration pandemic policy suspending asylum access, they have also promulgated a new regulation slashing access to asylum protections indefinitely, and now are reportedly considering bringing back an Obama- and Trump-era policy of family detention as a deterrent. All flagrantly cruel and inhumane ways to dodge international commitments to refugees at a time when—far from trying to suspend immigration—our leaders should be actively working to facilitate it!

Members of Congress are not much better. The two senators who seemed most willing to challenge the Fed's interest rate policy seemed to display no interest in attacking the labor supply problem from the other direction. Sen. Kennedy's preferred policy solution was to cut government spending as a supposedly more flexible and less blunt tool to tamp down excess growth. I'm not sure why this wouldn't have roughly the same effect as interest rate hikes, however. Plus, there's also the moral issue: with entitlement spending and defense cuts taken off the table for political reasons, the only spending cuts Congress would be likely to approve would be slashes to desperately-needed safety net programs for poor people. So, no thanks, let's not go that route if we can possibly avoid it. 

Elizabeth Warren, meanwhile, is no opponent of immigration, but neither does the issue seem to be particularly important to her. Her preferred solution is to instead blame price hikes on corporate greed; but this is profoundly unhelpful. Prices are set through forces of supply and demand. We live under an economic system of competition, and if some firms were to voluntarily lower their profitability for the sake of public spiritedness, shareholders would quickly punish them for it. Any attack on high prices therefore has to be made system-wide, not by individual actors. And if system-wide policies are set to limit prices by force, this would be mistaking the symptom for the disease. The result of such price controls would likely be nothing more than widespread shortages. The same job loss Warren is trying to prevent by arguing against Fed policy would therefore result nonetheless. 

This leaves immigration as the obvious win-win (especially since it would also help address our entitlement program insolvency issue too!—since working age adult immigrants pay into the social security fund). Yet no one in Washington seems willing to stand up and advocate for it. Both major parties have bought into a similar economic-nationalist vision. Both are, at present, effectively operating as anti-immigrant, nativist parties. The Democrats may do it with nicer-sounding words, but their policies in practice have been nearly as restrictionist in effect as Trump's. At the very moment when immigration is most needed, therefore, both parties are in lockstep in seeking to prevent it. I can only return to John Kenneth Galbraith's apt question about immigration policy, which he asked all the way back in 1979: "What is the perversity in the human soul that causes people so to resist so obvious a good?" 

The answer that usually comes back, even from people who acknowledge immigration's economic benefits, has something to do with the nation's "cohesion" and "social fabric." If immigration levels are too high, these commentators argue, then the nation will lose the sense of collective identity that is needed to keep it functioning. It will collapse under a weight of polyglot diversity and multiculturalism. 

What this argument ignores is the fact that every nation-state is an "invented community" anyway. Every national identity has to be constructed out of polyglot elements. "France"—often portrayed now as an historically linguistically homogenous nation-state, in fact is a creation of the latter half of the nineteenth century. People speaking mutually-incomprehensible dialects and historically riven by ethnic divisions were given a new national identity through comprehensive national schooling. The same goes for Italy, Germany, and every other nation-state. 

Commentators also forget how quickly a national identity can be adopted—with enthusiasm—by any new immigrant group. Just ask a random sample of birthright citizens and naturalized citizens their opinions of the country. Ten bucks says the latter will be the more patriotic Americans. 

Finally, immigration restrictionists ignore the fact that every cultural and linguistic argument they urge against today's immigrant communities was deployed in exactly the same form against every prior non-WASP immigrant community too, none of whom is now openly accused in polite society of failure to assimilate: Southern European Catholics, Eastern European Jews, the Irish, the Poles, and so on. John Dos Passos's moving collage of early twentieth century American life, Manhattan Transfer, for instance, reminds us that French immigrants were once yelled at in American streets for not speaking English. And one reactionary WASP character in Dos Passos's book complains over the dinner table: "we built up this country and then we allow a lot of foreigners, the scum of Europe, the offscourings of Polish ghettoes to come and run it for us."

Dos Passos's great novel of the 1920s—which I read for the first time this past week—shows us an America that is deeply familiar to the one we currently inhabit, in both its looming economic plight and its hostility to the non-native-born. It is a money-mad nation beset by financial panics, where the rich made their pile by gambling on the stock exchanges, and a homeless man wandering the Bowery and cadging quarters was formerly known as the "Wizard of Wall Street." One character warns another against saving money because it could all disappear some day in a bank failure—a line that seems all too eerily familiar today, as the news breaks as I write this that we have just experienced the second-largest bank failure in recent history, with the collapse of Silicon Valley Bank— a result driven in part by Fed policy.

It was also a nation consumed with ill-founded fears of immigration. Change a few of the slurs and identities specifically mentioned in the WASP reactionary's diatribe above, and you have today's paranoid fulminations against Central American, Caribbean, African, and Asian immigrants. What is different about today's nativism that should make it any more worthy of respect than the chauvinism chronicled in Dos Passos's satirical hands? 

Plainly, as this past week's events show, we remain a nation of irrational financial exuberance and panics, as well as a nation of irrational xenophobia, as much today as we did in the era Dos Passos chronicled. So long as we allow these irrationalisms to guide our policy, we will continue to harm ourselves as much as the generations of new Americans who might otherwise benefit from more welcoming policies. We will leave the Fed with no choice but to go on tamping down economic growth and slowing down hiring in the labor market, because we refuse to attack the problem from the other direction through a wise intervention in immigration policy. We will thereby leave ourselves with less, instead of more, overall—all just so we can avoid having to share it with others.