Lael Brainard, director of President Biden’s National Economic Council, recently brought glad tidings for the U.S. economy and something more to think about.
Reflecting on recent data on GDP growth, employment and on the Federal Reserve’s ongoing effort to bring down inflation — all while it attempted to avoid a 2023 recession — Brainard said the “width of a runway for a soft landing has gotten much bigger.” She indicated, optimistically, that the economy is “going to maintain strength going into next year.”
Until recently a Fed vice-chair, Brainard also praised the job done by Chair Jerome Powell, offering an important insight that deserves more attention. Immigration, a factor that receives more curses than praise in Washington, had “helped the U.S. labor force rebound.”
Turning the analytical spotlight on the economy’s supply side for a change — those who produce things behind the scenes rather than the consumption that takes place in plain sight — Brainard reminded us that it is not necessary to have a recession to bring down inflation. Indeed, if we can tap into the world’s labor supply, and if we can bring in more goods, the resulting increases in supply may actually counteract some of Washington’s COVID-rushed printing press money and the inflationary spiral it began.
We must note that Brainard also said there were more risks to be countered and that there is more work to be done. That’s certainly true, even if the White House does not acknowledge that President Biden’s 2020 decision to print and deposit more than $1 trillion into America’s bank accounts led to a spending rush that caused Consumer Price Index-measured inflation to rise to more than 9 percent about 18 months later.
Unfortunately, printing new money did not magically lead to a sudden appearance of more new cars and trucks on dealer lots, more beef or turkey in our supermarkets, more paint or home improvement goods in our hardware stores or more health care providers in our hospitals. With more cash circulating, prices shot skyward instead.
But, because incentives matter and as Brainard reminds us, something good did happen on the supply side. In 2021, there was a 6 percent increase in foreign-born, over-25 workers employed on U.S. payrolls, followed by a 10 percent increase in 2022. There had been nothing like it in the previous 15 years.
To add more to the supply-side story, there was a large increase in imported goods and services from other countries. In 2021, there was a 14.4 percent increase, as measured year-over-year in constant dollars; in 2022, an 8.6 percent increase.
Put another way, we had more workers and more goods coming to our shores. Supply increased, giving consumers more choices and better-stocked shelves, driving some prices downward and cooling inflation’s flames a bit more than the Fed’s efforts would have done alone.
As has been said often before, the cure for high prices is … high prices. These can be a prelude to plenty. Like the home furnace thermostat on a hot morning, when the indoor temperature hits a trigger point, better things follow. Businesses and workers, domestic or foreign, see the potential profits of more goods or more labor and bring relief.
But while that’s how a self-regulating market economy is supposed to work, not everyone likes what happens. Here’s where politics, protectionism and government intervention enter our story. After all, more foreign-born workers looking for jobs are seen, sometimes erroneously, as competition for domestic workers. More imported goods alleviating the scarcity that drives up prices is competition for domestically made goods looking for a home.
Yet it is also competition that brings lower costs, less inflation and, in the long run, more prosperity for Americans. Long-run thinking can be a challenge for politicians who must survive in the short run. That’s why it’s important for all of us to remember the lesson contained in Lael Brainard’s good tidings.
Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University’s College of Business and Behavioral Sciences.