133 – Adam Ozimek on Population Growth, Declining Business Dynamism and Fed Policy

Episode Summary

Executive Summary: Adam Ozimek argues that the Fed tightened too soon after the Great Recession by underestimating labor-market slack, leaving the recovery weaker and slower than it could have been. He also presents evidence that population growth affects inflation, startup formation, and productivity, largely through housing and labor-market channels, implying demographics are an important macro headwind policymakers underweight.

Main Topics: Adam Ozimek’s path into economics and policy commentary (Priority: 2/5): Ozimek explains how economics appealed to his mix of business, social science, math, philosophy, and current events interests, and how social media/blogging became central to his work. The Fed’s early tightening after the Great Recession (Priority: 5/5): Ozimek argues the Fed raised rates too soon because it underestimated labor-market slack and revised down its estimate of long-run unemployment, implying policy was more restrictive than intended and likely a mistake. Quantifying the cost of premature rate hikes (Priority: 5/5): Using alternative rate-path counterfactuals and Moody’s macro model, Ozimek estimates that following a more dovish path would have reduced unemployment and created substantially more jobs. Population growth and inflation (Priority: 4/5): Ozimek presents a theory and evidence that population growth is inflationary via housing and land constraints, with stronger effects when population growth is negative or slowing. Population growth, startups, and business dynamism (Priority: 4/5): He links slower population growth to lower startup rates, arguing that new demand and labor supply shocks are more likely to be met by new firms, and uses migration-based instruments for identification. Aging and productivity (Priority: 4/5): Ozimek finds that older workforces are associated with weaker productivity growth, suggesting an 'albatross' effect where older workers may slow adoption of new technologies and practices. Policy implications for demographics and growth (Priority: 5/5): The conversation ends by tying the research together: slower population growth and aging may weigh on inflation, entrepreneurship, and productivity, pointing toward immigration and a more tolerant policy framework as possible offsets.

Key Arguments: The Fed’s downward revisions to long-run unemployment estimates mean it likely tightened earlier than it should have, not just earlier than it later thought it should have. If policy was less accommodative than the Fed believed, it was effectively too tight and likely slowed the recovery unnecessarily. Counterfactual model estimates suggest a more dovish rate path would have lowered unemployment by 0.3 to 0.6 percentage points and added 500,000 to 1 million jobs. Structural explanations for post-crisis weakness were overused; demand-side weakness and policy mistakes were underappreciated. Population growth can raise inflation through housing and land scarcity, creating persistent upward pressure rather than just a one-time price-level effect. Negative or slowing population growth reduces startup formation because fewer customers and workers reduce incentives for new-firm entry. Aging of the workforce is associated with lower productivity growth, potentially because older workers slow technology adoption and organizational change. Immigration and a younger, growing population may offset some of the macroeconomic drag from aging and low population growth.

Data Points: Fed target rate after September FOMC: 2.0% to 2.25% - The host notes the Fed’s rate range after a 25 basis point hike. Fed rate hike size: 25 basis points - September FOMC meeting discussed at the start of the Fed policy section. Fed’s thought long-run unemployment in Dec. 2015: 4.9% - Used in the discussion of labor-market slack when the Fed began hiking. Actual unemployment at the time: 5.0% - Compared with the Fed’s 4.9% long-run unemployment estimate in late 2015. Estimated unemployment gap at the start of hikes: 0.1 percentage point - Ozimek uses this to show the Fed thought slack was minimal when hikes began. Estimated unemployment reduction under counterfactual: 0.3 to 0.6 percentage points lower - Model result if the Fed had followed the more dovish path Ozimek argues for. Estimated job gains under counterfactual: 500,000 to 1 million more jobs - Moody’s model estimate of the employment effect of a better rate path. Population growth and inflation study coverage: Cross-country panel; U.S. metro panel from 1971 to 2016; long-run model - Describes the empirical design of the population-growth/inflation paper. Productivity age threshold: 65 and up - Share of workers age 65+ is central to the productivity puzzle paper. Productivity slowdown estimate: 0.3 to 0.75 percentage points per year - Ozimek’s rough estimate of the drag from aging on aggregate productivity growth. Startup-population research method: Instrumental variable using metro-to-metro migration flows - Used to identify exogenous variation in metro population growth. Historical reference for monetary history acceptance: About 30 years - Host references Friedman and Schwartz’s Great Depression demand story taking decades to become mainstream.

Pivotal Quotes: "monetary policy turns out it was less accommodative than we thought" — Adam Ozimek / quoting Fed officials: Describing how Fed leaders like Kashkari and Powell acknowledged the policy path was tighter than initially believed. "That implies that it was less accommodative than it should have been" — Adam Ozimek: Ozimek’s core interpretive leap: the Fed’s own admission points to a policy mistake, not just a misestimate. "older workers bring down pay for other workers" — Adam Ozimek: Summarizing the firm-level finding in his aging-and-productivity research.

Implications: The episode suggests demographics are a major macro force shaping inflation, entrepreneurship, productivity, and monetary policy effectiveness. For policymakers, that means more caution about early tightening, more attention to labor slack, and stronger consideration of immigration and growth-friendly policy.