US economy is doing better than expected. Thank immigrants for that

Although many politicians will never admit it, the U.S. economy is currently performing far better than most analysts expected. We’re still adding jobs at a rapid clip; while inflation remains unacceptably high, it’s probably coming down. How are we pulling this off ?

There are surely multiple reasons. But you may not have heard about one ingredient in the economy’s special sauce: a sudden, salutary rebound in net immigration, which soared in 2022 to more than 1 million people, its highest level since 2017. We don’t know whether this rebound will last, but it has been really helpful. It’s only somewhat of an exaggeration to say that immigrants are saving the U.S. economy.

About that economy: Despite rising interest rates, the labor market remains stubbornly strong. Not only has employment bounced back with stunning speed from the COVID-19 recession, it’s actually running above pre-COVID projections.

In today’s topsy-turvy policy environment, good news is often considered bad news. The Fed is trying to slow the economy, maybe even generate a recession, to slow inflation. So strong employment numbers arguably should be worrisome, a harbinger of worse inflation to come.

But this doesn’t seem to be happening. The debate among economists picking over the entrails of wage and price data, seeking auguries for the future, is mind-numbing even for those of us who do this stuff for a living. Overall, however, it looks as if inflation is, if anything, subsiding despite torrid job creation.

How is this possible? Let’s take the 30,000-foot view of the U.S. economy over the past three years. The story goes like this: Faced with a pandemic that temporarily shut down a large part of the economy, the federal government responded with huge aid programs to help laid-off workers, troubled businesses and more.

These programs greatly alleviated what could have been severe economic hardship, but they also maintained or enhanced the public’s ability to buy goods and services at a time when the economy’s ability to supply these goods and services was reduced by pandemic-related disruptions. The result was inflation.

Now, many of those pandemic disruptions have been resolved. But until very recently many people were arguing that the pandemic had done long-term damage to the U.S. economy’s productive capacity, largely by reducing potential labor supply.

For example, back in November Jerome Powell, the Fed chair, gave a speech in which he argued that there were still millions of “missing workers” relative to pre-COVID expectations. COVID-19 had directly reduced labor supply, killing off around 400,000 potential workers; the symptoms of long COVID may be keeping many more from working. Powell also argued that the pandemic had led to millions of early retirements by older workers. Finally, he emphasized a sharp drop-off in net immigration.

Just a few months later, many though not all of Powell’s concerns appear to have been misplaced. Tales of early retirement aren’t supported by the data: Labor force participation for Americans between 55 and 64 is fully back to pre-COVID levels.

And as I said, immigration has really rebounded. Recent immigrants are overwhelmingly working-age adults, according to census data.

Immigration, then, has helped limit the short-run adverse effects of high pandemic spending. What about the long run?

There, the case for increased immigration is even stronger. Long-run concerns about U.S. finances are largely driven by a rising old-age dependency ratio, which considers the growing percentage of seniors relative to the total adult population, both seniors and people of working age. If we define working age as running from 18 to 64, the overall U.S. old-age dependency ratio — calculated from the same census data — is 27.5%. For foreignborn residents who arrived after 2010, the ratio is only 5.8%. Basically, new immigrants pay into the system, but they won’t be drawing much in the way of benefits for many years to come.

So the resurgence of immigration is, from an economic point of view, a good thing all around. And a rational political system, one that wasn’t being misled by false claims about immigration and crime, would welcome a sustained immigration revival.