Walling off America to immigrants is a bad idea. Unless you’re a Native American in 1600, in which case, “Build that wall! Build that wall!”
I’m just joking. Not really, though. One of the tragic ironies of the so-called “anti-woke” movement is the extent to which it treats the idea of America as an illegitimate colonial project as inherently crazy, while simultaneously arguing for closed borders in the interest of preserving a “native” way of life. I didn’t highlight that glaring discrepancy in the latest Monthly Letter, but I should’ve.
Anyway, everyone with an ounce of sense about them understands that immigration’s key for the US economy, labor force and inflation dynamics. As documented here last month, immigration probably goes a long way towards explaining the benign character of labor market normalization in 2023 and expectations about immigration also inform some of the more rosy economic outlooks for 2024 and beyond.
When it comes to the implications of immigration-driven macro shifts for rates, and specifically the neutral rate, you can argue either way — i.e., for a higher or lower neutral.
I’ve seen both cases argued persuasively over the past year or so, and because this ties together two crucial threads (immigration and r-star), I thought it was worth highlighting Katy Huberty’s brief summary of a longer Morgan Stanley note on the subject(s).
Huberty is the bank’s global director of research. She publishes a popular compendium of key charts and notes, which is quite useful for anyone who’s pressed for time and thereby unable to wade through the daily deluge of longer-form commentary.
“Immigration is driving faster growth in the population and labor supply, which explains some of last year’s upside surprise in the US’s nonfarm payroll data,” Huberty wrote this week, noting that because immigration can boost aggregate demand, it could push short-term neutral higher. More demand’s inflationary, after all.
And yet, as the figure below shows, US regions with higher immigration saw lower inflation a year later.
That’s probably not a coincidence. An influx of low-wage labor can (and generally will) moderate services sector price growth.
How pronounced that disinflationary effect is, and how strong the causality, are separate questions. The directionality, though, isn’t really debatable.
What are the implications for the longer run neutral rate of a simultaneous boost to both aggregate demand and supply like that associated with an immigration surge? Along with questions about the read-through of an expected productivity boom from the AI “revolution,” that’s one of the key macro debates. Huberty captured it in just a few sentences.
“As any supply-boosting effects manifest, the productive level of the economy is higher, suggesting easier policy to allow the economy to grow to its higher potential,” she wrote (emphasis mine). “Over the long run, only a persistently faster growth rate in immigration, as opposed to a one-off surge, would raise r-star.”
Bottom line: Immigration’s becoming more and more important to the US macro narrative. And at a time when it’s becoming more and more contentious as a political flashpoint.
