Record-high inflation has wreaked havoc on an economy already struggling to recover from COVID-19. The Federal Reserve is aggressively hiking interest rates, but it’s too little, too late. When too much money chases too few goods, rising prices are inevitable. Since the start of the pandemic, the monetary base has risen 60 percent and the M2 money supply 40 percent, outpacing the uncertainty-induced spike in liquidity demand. If we want to tame inflation, we need to stop running the printing presses. But we also need bold supply-side reforms.
It’s time to liberalize immigration policy. Making it easier for people to come here and work increases the availability of labor. That would boost the goods supply relative to the money supply. While it’s not a panacea, immigration can ease pricing pressures. Making green cards, visas and even citizenship easier to obtain makes economic sense, and it offers humanitarian benefits as well.
In the long run, living standards depend on supply-side factors. These include the amount of labor and capital, technological progress and a supportive regulatory environment. The White House, Congress and the Federal Reserve have focused too much on the demand side. While demand stimulus can temporarily cushion falling incomes and wealth, it isn’t sustainable. Policymakers quickly run into the fundamental constraint: how much the economy can produce.
Augmenting demand leads to higher prices, but augmenting supply leads to lower prices. The secret to broad-based prosperity is making goods and services more abundant, and therefore cheaper. “Supply-side economics” isn’t fundamentally about tax cuts, and there’s no reason conservatives should have a monopoly on it. Liberals can profit from this agenda, too. Immigration reform is the place to start.
Many people worry that increased immigration will lower current workers’ wages, already eroding because of inflation. While it’s true prices are rising faster than wages, immigration won’t make things worse.
BY DAVID JAMES HEBERT & ALEXANDER WILLIAM SALTER
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