President Trump is declining to take credit for the bipartisan housing bill that recently passed Congress, instead allowing it to take effect at midnight without signing it. While we find his refusal to take a victory lap confounding, our efforts continue at understanding the rest of America. This week, Daniel takes a look at a fascinating new study on the economic benefits of a smaller labor force:
Last fall, the Economic Policy Institute offered a dispiriting warning about America’s shrinking workforce, leaving only one door open. The American-born labor force will shrink over the coming decade, the think tank reported, and no plausible increase in participation from the existing population can offset the decline. Based on the arithmetic that output is hours worked times output per hour, thus fewer hours means lower output, the report determined that “any decline in labor force growth necessarily leads to a decline in the rate of growth of gross domestic product” (emphasis added). Policymakers who do not want growth to stall, EPI concluded, “really only have one option: allowing larger flows of immigration.”
That a labor-left institution now arrives at the same conclusion as the business lobby shows how little the premise is contested. But it rests on a hidden assumption: that the output of an hour of labor is fixed, no matter how many workers there are to supply it.
A new paper from Daron Acemoglu, David Autor, and coauthors offers evidence that this assumption might be faulty. The economists searched for the demographic drag across more than 100 countries and hundreds of U.S. communities since 1950—and they couldn’t find it. Instead, they found that lower birth rates predicted faster growth in output per working-age adult and, in turn, higher wages, with no decline in aggregate output. A nation whose birth rate ran a point lower mid-century tended to post output per worker about a quarter higher by 2000.
The reason, the authors argue, is a force called induced innovation. When workers grow scarce, employers have reason to make do with fewer of them. The economic historian H.J. Habakkuk traced this phenomenon in nineteenth-century America, which mechanized faster than Britain because labor here was dear, incentivizing manufacturers to build machines to do without it. The paper finds the same logic in the modern data. Countries and regions with lower birth rates generated more labor-saving patents, tilted toward high-tech industries, and posted faster total factor productivity growth. The scarcity of young workers did not hollow out these economies; it changed how work was done, for the better.
To separate cause from correlation, the authors exploit a natural experiment no one would have designed: the deaths of the Second World War. Casualties from the conflict fell overwhelmingly on young men, while civilian losses fell across every age. Countries that lost more of their young men to the fighting were richer per capita decades later; countries that lost civilians broadly were poorer. What raised incomes was not the scale of the loss but its concentration among the young, which is the same scarcity a falling birth rate produces by gentler means.
The paper studies birth rates, not immigration; the authors chose births precisely because migration flows toward prosperous, growing places, which would blur cause and effect. But the factor driving the innovation and productivity gains is the price of young labor, regardless of what makes it scarce. And no policy does more to expand the supply of young workers, and so to hold that price down, than immigration.
A grower does not decide whether to buy a mechanical harvester based solely on today’s wage; he forecasts labor costs across the seasons the machine will run. The harvester earns back its cost only if labor remains scarce, so a grower confident that the hand-picking crews will keep coming simply waits, and the machine is never bought, ensuring that the jobs he has to offer remain ones he needs exploitable immigrant labor to fill. An immigration regime built atop a large unauthorized workforce, lax enforcement against the businesses that hire it, and temporary workers for anyone who asks underwrites that confidence. Market-driven migration may lag a shortage; a standing policy of open supply prevents the shortage, and the pressure to mechanize, from ever setting in.
In the Acemoglu paper, aggregate output, remarkably, did not fall at all. As birth rates fell, total output held steady while output per worker climbed. The economy did not grow larger; the workers inside it grew more productive and better paid. The case for importing workers to prop up growth is a case about the size of the economy: more heads, more hours, more gross output. It says nothing about whether the workers and families already here are made better off, which is the proper test of a policy that claims to serve them.
Importantly, this same logic applies across skill levels. This is an argument about prices, not about immigrants. When an influx of labor reduces the wages at which markets clear—including the nominally high-skilled programmer sponsored beneath the prevailing programmer wage—businesses rationally pursue the low road at every tier. Underpricing loosens the labor market at the top exactly as it does at the bottom.
The same logic applies to the falling birth rate itself. Americans are having fewer children—the fertility rate has sat below replacement since 2008—and no one should pretend that is welcome news. But the paper severs two things that the alarm over falling birth rates treats as one: the number of strong families raising a nation’s future citizens, which is an end in itself, and the supply of labor to prop up the economy, which immigration provides but might not, in fact, be beneficial.
Americans are not, on the whole, choosing childlessness: they still say they want about 2.4 children while the birth rate has fallen below 1.6, the widest gap between desire and outcome since the early 1970s. What closes that gap is marriage, and marriage rates, in part, turn on the economic standing of young men. Their falling earnings, Autor’s own work with David Dorn and Gordon Hanson has shown, pull down marriage and the childbearing that follows. Cheap imported labor, which drives down wages in the short run and reduces the incentive to improve job quality in the long run, is thus more of a culprit than a cure.
While some people have read the paper as weakening the case for trying to boost birth rates, the real effect is to clarify and thus strengthen it. For too long, some on the Right have defended the family on their opponents’ terms, arguing the nation needs babies to man the workforce and fund the entitlements. That frames children as an economic input, and invites the reply that immigrants are a cheaper one. The paper’s evidence dissolves the trap. A nation can want more children because children are the future of a people and the substance of its continuity, and trust that its economy will not collapse for want of labor in the meantime. The family needs no economic defense. — Daniel
THE ARC OF THE MORAL UNIVERSE…
Speaking of settled economic wisdom that wasn’t: few have dispensed it with more certainty, or been wrong more often, than Paul Krugman. Among the high priests of free trade, he has always held a special position as crude ideological enforcer, what with his Nobel Prize and his habit of making absurdly absolutist assertions with condescending certainty. Some of our favorites:
In a 1993 essay in the American Economic Review, he answered the question, “What Do Undergraduates Need to Know About Trade?” with: “In the last decade of the 20th century, the essential things to teach students are still the insights of Hume and Ricardo. That is, we need to teach them that trade deficits are self-correcting.”
In 1996, in Business Economics, “I have tried carefully explaining economic concepts like, say, comparative advantage; it doesn’t work. What does work, sometimes, is ridicule. If you can make someone who imagines himself to be a deep sophisticate look silly, sometimes it gives him—or at least someone else who might be tempted to follow the same route—pause.”
In 1997, in the Journal of Economic Literature, “The economist’s case for free trade is essentially a unilateral case: a country serves its own interests by pursuing free trade regardless of what other countries may do.”
Harvard University professor Dani Rodrik, a skeptic of globalization, has also told the story of how Krugman’s feedback to him on a manuscript was that “he told me he had no quarrel with my economics, but that I should not be ‘providing ammunition to the barbarians’—that is, I should not give comfort to all those protectionists who stand ready to hijack any argument that seems to provide intellectual respectability to their positions.”
So it was notable last year when Krugman conceded to Oren that his claim about self-correcting trade deficits had been “naive.” But the fumble recovered and returned for a touchdown comes in his recent comments on Wall Street Week:
The idea that you need to maintain capacity in your own country or in reliable allies for strategically important stuff is now very, very real. I am really reluctant to be where I am right now, but I do think that conditional tariffs on Chinese cars are probably going to be necessary. … I’ve been shocked not only by my own change of mind, but by some of my colleagues’ … It’s not 20 years ago anymore. We really do need to rethink.
Far be it from us to spike the football, or perform some elaborate team dance in the end zone, or resort to the ridicule of which Krugman was so fond. At American Compass, we welcome converts, and so as our good friend Professor Krugman arrives at the party 30 years late, we pat him on the back and say, “Glad to see you.”
GOOD READS FOR YOUR WEEKEND
In the New York Times, Mohamed El-Erian writes America Was Being Played. The Bessent Doctrine Says Those Days Are Over. Treasury Secretary Scott Bessent has been doing yeoman’s work over the past couple of months (including at American Compass’s New World Gala), articulating the principles and successes of the Trump administration’s global economic reset. Here, El-Erian does an excellent job making sense of what it all means. But if you’ve been reading Understanding America for the past two years, you’ll wonder how anyone could only be figuring it out now.
In Compact, Ralph Leonard writes about The Deterritorialization of the World Cup. The national side has taken on a different meaning in a globalized world.
The New York Times reports on the work of Emma Waters, A Conservative Role Model for Ending the Fertility Crisis. Come for the important coverage of Emma’s work, stay for the hilarious rebuttals from “professional medical associations” suddenly concerned about efforts “motivated by ideology rather than solid clinical evidence” and a sociologist with only a loose grasp of causation who warns that romanticizing “traditional” family life is an “unhealthy kind of nostalgia” because, wait for it, “in reality infant mortality was high and standards of living were low.” Was it the traditional family life, or the lack of modern medicine, that led to high infant mortality in the past? Maybe the professional medical associations could weigh in.
Aaron Renn, noting that “deaths now outnumber births across most of the country—and the effects are just beginning to arrive,” writes that Most of America Is Pittsburgh Now.
The Wall Street Journal reports America Needs More Weapons. JPMorgan Wants to Add Its Firepower. “Jamie Dimon is putting the bank’s own funds into defense and other vital industries and plans to broadly expand in the national-security sector.” Mary Poppins would approve.
And Friend of the Stack Peter Harrell is launching his own Substack, to which you should subscribe if you’re interested in trade and industrial policy.
CHEERS AND JEERS…
…for AEI’s Michael Strain. At Project Syndicate, he has an excellent piece on the problems with remote work, a beat he has been ably walking for years now: “My advice for the two million young people who graduated with bachelor’s degrees over the last few months and are just starting their careers: Go to work—not just figuratively, but literally.”
But we must take issue with a couple of Dr. Strain’s recent tweets, including one that dismisses the idea of “America as a manufacturing economy” as an “elite vision of national greatness” and one that says economists are struggling to defend free-market capitalism against socialism because many “do not value viewpoint diversity, do not seem to care that enforcing viewpoint orthodoxy is severely damaging their ability to generate ‘true knowledge,’ and therefore do not have the muscles required for true, open debate.”
In the immortal words of Pam Beasley, “They’re the same picture.”
AND SORRY, JUST JEERS…
…for The Argument, where Jerusalem Demsas published one of the more bizarre meditations on America’s 250th birthday, Your God-Given Right To Be Happy. In the Declaration’s reference to the “pursuit of happiness,” she writes, “pursuit” really means “practice,” so it is asserting that we all have a natural right to be happy.
This is half true. She is on to something with pursuit-as-practice, but what is it that we are practicing? As the National Constitution Center’s Jeffrey Rosen explains:
Today we think of happiness as the pursuit of pleasure. But classical and Enlightenment thinkers defined happiness as the pursuit of virtue—as being good, rather than feeling good. For this reason, the Founders believed that the quest for happiness is a daily practice, requiring mental and spiritual self-discipline, as well as mindfulness and rigorous time management. At its core, the Founders viewed the pursuit of happiness as a lifelong quest for character improvement, where we use our powers of reason to moderate our unproductive emotions so that we can be our best selves and serve others.
That makes more sense, and seems more in keeping with the serious moral framework of the Founders, though not so much the fun of “libbing out” online.
Demsas concludes with, “day to day, what makes people happy are friends and family, yes, but also, stuff! The blast of AC when you come in from a hot day, a glass of wine with some friends on your front porch, a bouquet of flowers from your spouse, a place to call home …” Perhaps tellingly, almost none of these are actually “stuff.” It is not the glass of wine but the friends, not the bouquet of flowers but the spouse who thinks of you, not the lease on your Brooklyn brownstone but a home. Rewrite the sentence about stuff, “an air-conditioned apartment, flowers, a glass of wine,” and you may indeed have a description of life in the Abundance movement, but not one of human flourishing, or happiness well understood.
AND NOW, FOR YOUR LINKS
We have two weeks of material here, and you won’t make it through unless we speed things up. So, here goes:
On Globalization
Benn Steil, director of international economics at the Council on Foreign Relations, has an excellent essay on Why Rules-Based Orders Fail. “For a brief period after the Cold War, Americans persuaded themselves that the liberal order had become self-sustaining—that universal rules, democratic legitimacy, and economic interdependence had rendered old-fashioned power politics obsolete. But the order rested less on the autonomous authority of rules than on a historically exceptional concentration of American power and institutional confidence.”
Stephen Miran, recent chair of President Trump’s Council of Economic Advisers, writes in the Wall Street Journal on The Low-Tax Case for Tariffs. “The standard criticism from trade economists is that optimal tariffs only work in theory because in practice retaliatory trade measures from other countries erode the benefits of our trade levies. Experience, however, has disproved this objection.”
On Artificial Intelligence.
In the Wall Street Journal, Is an AI Jobs Apocalypse Coming? Three Economists Square Off. “The predictions are all over the place. Why do the optimists and pessimists see the same data—and come to such widely different conclusions?”
In the Financial Times, Heavy Corporate AI Spenders Add Staff Faster Than Peers. “Study of 22,000 US companies challenges fears that generative AI will trigger broad job losses.”
In the New York Times, Can You Embrace A.I. Without Layoffs? This Company Says It’s Trying. “The German software giant SAP says it is betting that employees can reinvent jobs instead of eliminating them. Experts are divided on whether it will work.”
Yascha Mounk has an excellent conversation with Princeton computer scientist Arvind Narayanan on Why AI Isn’t All That Revolutionary. “There are so many bottlenecks between AI capability increasing and it having these impacts, both good and bad, especially if you want to really integrate it into the economy and derive something useful out of it. There are so many things that have to go right. We think those are going to happen over a period of decades, not months or years.”
And back to the Journal, Big Tech Has Suddenly Flipped on the AI Jobs Wipeout Scenario. Is it because they read all of the other fine pieces in this section, or because, “as public opinion of AI shifts into negative, warnings of mass employment reductions diminish”? You be the judge!
On the Labor Market.
In the Wall Street Journal, He Earns $33 an Hour as a Costco Cashier. Now He’s a Millionaire. “Long-tenured workers like cashier Tony Barzar are reliable, experienced and able to speed shoppers through a checkout line. Costco is willing to pay to keep them around.” As Oren noted on Twitter, this one simple trick ensures Costco can fill jobs with American workers!
In Compact, Representative Riley Moore (R-WV) writes on Restoring the American Worker’s Agency. “Pro-worker conservatives need not listen to corporate America and its media allies’ lectures about fiscal responsibility, workers’ rights, or conservative values. Instead, we should be working to address the broken arrangement these companies have with their own employees through policy that gives American workers more agency.”
And back to the Journal again, Moving Back Home Used to Be a Sign of Failure. Now It Shows Financial Savvy. “Nearly half of American adults under 30, pinched by the high cost of housing, are living with a parent. It can be an adjustment for both.” If only these young Americans knew to adjust their wages using the PCE deflator instead of the CPI deflator, they’d understand that it has become easier than ever to make it on their own.
The Washington Post profiles Four Black Women. Nine Degrees. Not One Steady Paycheck. A deeply depressing story about, more than anything, a downright fraudulent higher education system.
Speaking of education…
Even the New York Times has decided it might be a good idea to have objective standards for college preparedness, instead of calling the standards racist. Of the University of California system, the editorial board warns, A Great University Undermines Its Mission. “Tellingly, when the university system announced in 2020 that it was going test-blind, it also vowed to develop an alternative test that would be ‘fair,’ ‘useful’ and ‘reliable.’ The system has since abandoned the effort as ‘not feasible.’ The reversal is a sign of the obvious: Any fair, reliable test would have results resembling those of the SAT and ACT.”
At AEI, Mark Schneider dives into Learning Disabilities and the Perils of Well-Meaning Programs. “Private not-for-profit universities have the highest concentration of students with disabilities. That proportion is even higher at the eight Ivy League universities. The lowest concentration is among public two-year institutions (community colleges).”
Is it education? Is it tech? In the American Compass Slack, it gets filed under #dystopia:
From Brooke Istook at Jonathan Haidt’s After Babel, What Does a 13-Year-Old See on Snapchat in a Normal Week? “Exposing children to graphic content, sexual material, exploitation, and predatory contact has never been something society accepted as normal…”
Nevertheless, enjoy the weekend!
It's always sad to read this kind of piece, where the author ignores the performative cruelty inherent in Don's immigration policies. There is a legitimate debate to be had with good faith actors of every perspective on these issues. There is also a way to execute those consensus policies without the violence and cruelty we've witnessed.
A sober analysis of administration policy must acknowledge this reality to be taken seriously. There are fellow human beings involved, we should be able to act like a civilized nation.
Establishment elites like AC have a special responsibility to lead on the values embedded in our Declaration. Assuming they believe in them...
A similar natural experiment was the Black Death. It had very profound effects beyond the population decline. The balance of power between peasants and landowners was permanently altered leading to the demise of serfdom and the invention of labor saving machinery.