Fed's Miran's Calculation May Overstate Immigration's Impact on Inflation

Post by : Monika

In a recent speech, Federal Reserve Governor Stephen Miran argued that reducing immigration could significantly lower inflation in the United States, especially by reducing the demand for housing.

Miran based his argument on research by economist Albert Saiz from the Massachusetts Institute of Technology (MIT). Saiz’s studies examined how immigration can affect housing prices in certain cities, and Miran applied this research to national policy considerations. However, many economists, including Saiz himself, have raised concerns that Miran may have exaggerated the impact of immigration on overall inflation.

Understanding the Original Research

Albert Saiz’s research focused on the effects of immigration on local housing markets. One of his key studies looked at the “Mariel Boatlift” in 1980, when over 100,000 Cuban refugees arrived in Miami. The study found that this sudden increase in population led to higher housing rents in the city. Saiz’s analysis suggests that an influx of immigrants equivalent to 1% of a city’s population could result in a 1% increase in rents within that city.

It is important to note that Saiz’s research was conducted on a local level. It measured how a specific event in one city affected housing costs, not how immigration changes would affect the national economy. The findings are valuable for understanding local housing pressures but do not automatically translate to nationwide policy.

Miran’s Interpretation and Estimates

Governor Miran used Saiz’s findings to estimate the effects of immigration on national inflation. He suggested that reducing immigration could lower rent inflation by 2 percentage points through 2027. According to his calculations, this reduction in rent inflation could translate to a 0.4 percentage point decrease in overall U.S. inflation.

Miran argued that this potential drop in inflation could justify a 0.5 percentage point cut in the Federal Reserve’s policy rate. He suggested that lower interest rates would stimulate economic activity and help manage inflation more effectively. His argument implies that controlling immigration could be a tool to influence inflation and monetary policy.

Concerns Raised by Experts

Economists, including Albert Saiz, have expressed concerns about Miran’s interpretation. Saiz emphasized that his research was intended to analyze local effects and should not be directly applied to national inflation estimates. Applying local findings to the entire country may overstate the impact of immigration on overall inflation.

Saiz also highlighted that many other factors influence rent and overall inflation, including wages, construction costs, energy prices, and government policies. Immigration is only one of many variables affecting the economy. By focusing too heavily on immigration, policymakers risk oversimplifying a complex economic problem.

Policy Debate at the Federal Reserve

Miran’s statements have sparked debate among other Federal Reserve officials. Some policymakers support his view that aggressive interest rate cuts may be necessary to manage inflation and support economic growth. They argue that taking bold action now could prevent future economic problems, such as high unemployment or a slowdown in consumer spending.

However, other Federal Reserve leaders are more cautious. For example, Richmond Federal Reserve President Thomas Barkin has said that the risk of significant increases in unemployment or inflation appears limited.

Barkin and others suggest a gradual approach to monetary policy, emphasizing careful monitoring of economic indicators before making large changes to interest rates.

Federal Reserve Vice Chair for Supervision Michelle Bowman has voiced support for cutting interest rates to address challenges in the labor market. She argues that high interest rates may hinder economic recovery and slow job creation. Bowman emphasizes that rate adjustments should be used carefully to balance inflation control with economic growth.

The Complexity of Inflation

Inflation is the general increase in prices for goods and services across the economy. It affects the cost of living for households and the overall stability of the economy. Many factors contribute to inflation, including supply chain issues, energy prices, wages, consumer demand, and government spending.

Housing is a major component of inflation in the United States. Rent increases can significantly affect the overall inflation rate. However, attributing changes in inflation to a single factor, such as immigration, oversimplifies the issue. Housing costs are influenced by construction rates, interest rates, local regulations, and demographic trends, in addition to immigration.

Economists argue that reducing immigration alone is unlikely to have a major effect on national inflation. While lower immigration could reduce housing demand in certain cities, it would not automatically result in lower rents nationwide. Other factors, such as rising construction costs or high energy prices, could offset any potential benefits from lower immigration.

Potential Economic Implications

If policymakers overestimate the impact of immigration on inflation, they may make decisions that do not achieve the desired results. For example, cutting interest rates based on the assumption that reduced immigration will lower inflation could lead to unintended consequences.

Lower interest rates can stimulate borrowing and spending, which might increase demand for goods and services, potentially raising inflation instead of lowering it.

Furthermore, reducing immigration could have other economic effects. Immigrants contribute to the labor force, especially in industries like agriculture, technology, healthcare, and construction.

Limiting immigration could reduce the availability of workers, slow economic growth, and affect productivity. Policymakers need to consider these factors when making decisions based on immigration and inflation.

The Importance of Accurate Data

Governor Miran’s remarks highlight the importance of using accurate data and careful analysis in economic policymaking. Policymakers rely on research, statistics, and economic models to make decisions that affect millions of people. Misinterpreting or overstating research findings can lead to ineffective or harmful policies.

Economists stress that local studies, such as those analyzing city-level housing markets, are valuable for understanding specific trends. However, applying these findings directly to national policy requires caution and adjustments for broader economic conditions. National inflation depends on many factors, and no single variable can determine its trajectory.

Global Economic Context

The U.S. economy is also influenced by global economic conditions. Trade relationships, international demand for goods, and global energy prices all play a role in domestic inflation. Immigration, while important for labor markets and housing demand, is only one piece of a larger economic puzzle.

Federal Reserve policymakers must consider both domestic and international factors when setting interest rates. Decisions made in isolation, without accounting for the broader economic environment, may not produce the intended effects.

The debate over immigration and inflation illustrates the complexities of economic policy. While research shows that immigration can influence housing prices in specific cities, its effect on national inflation is much less certain. Applying local research to national policy, as Governor Miran did, may overstate the potential impact.

Federal Reserve officials must carefully weigh multiple factors when making decisions about interest rates and monetary policy. Inflation is influenced by housing, wages, energy prices, consumer demand, and global economic trends. Reducing immigration alone is unlikely to solve inflation challenges and may have unintended economic consequences.

As the Federal Reserve continues to monitor economic trends, it is essential that policymakers rely on accurate data, consider multiple factors, and avoid oversimplifying complex economic issues. Responsible economic management requires a careful balance between controlling inflation, supporting the labor market, and sustaining economic growth.

Understanding the role of immigration in the economy is important, but it should be analyzed alongside many other factors. Effective policy requires a comprehensive approach, considering housing, labor markets, energy, trade, and global economic conditions. Decisions based on incomplete or overstated analysis can have far-reaching effects on households, businesses, and the broader economy.

Ultimately, the discussion about immigration and inflation highlights the need for careful, evidence-based policymaking. Economists, researchers, and policymakers must work together to ensure that decisions are grounded in accurate data and that the potential impacts on the economy and society are fully understood.

Federal Reserve Stephen Miran