Don’t Worry About Inflation. Solve the Housing Shortage.

As millennials age into their family-forming years, their tastes are shifting, and the American consumer industry is ready to appeal to them. But while stories about how Scotts Miracle-Gro intends to win over millennial consumers make for fun cocktail-party conversation, there’s a more serious question about aging millennial households. Will the economy be able to meet this growing demand from a generation that’s getting a late start on traditional measures of adulthood? History suggests the answer is no.

The problem begins with how low the unemployment rate is, at 4.2 percent. That’s below the 4.6 percent estimate given by the Federal Reserve as the longer-run projection for unemployment. It’s why officials have increased interest rates twice this year, and are likely to do so again in December. They’re not looking to cause a recession, but they’re acting in a way to slow the economy down somewhat. But why? There’s a risk that the Fed will be guided by history and formulas rather than need.

For what reason does U.S. society today need its economy to be slowed down? In the last two cycles it was obvious. In the mid-2000s there was speculative excess in both the housing and credit markets that eventually did take down the economy. And in the late 1990s there was excess in the technology and telecom industries — not so much some of the high-flying internet stocks, but real economic excess in things like fiber-optic cable investments.

Today, we have none of that. Sure, whatever’s happening in the cryptocurrency world raises eyebrows, but if it all got wiped out tomorrow nobody should feel particularly bad for the people speculating in such a risky endeavor. It would be unlikely to have much of an impact on the real economy. Perhaps some tech stocks are overvalued. Perhaps we’re producing too many high-end television shows. Again, this doesn’t seem like a grave concern for the Federal Reserve.

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What we do have is a resource imbalance, which is where millennials come in. There’s already a shortage of housing, particularly entry-level houses, the sorts millennials are looking to buy. And to make things worse, we are not building enough houses to meet the housing needs of millennial families.

Because of low unemployment, and because the public sector remains in a bunker mentality when it comes to the hiring and pay of workers like teachers, firefighters and police officers, we’re also going to have a growing labor shortage in some of the areas where workers are needed most — the people who teach our kids and keep our communities safe.

Because of increased retirements from aging baby boomers, reduced immigration for economic and political reasons, and people pushed out of the workforce by the great recession, our labor force is inadequate to meet the needs of the aging millennial generation.

Labor demand outstripping labor supply should push up wages and inflation, but given our present circumstances, it’s not clear why society should want to tighten monetary policy to stop this from happening.

The more responsive approach would be to make it easier to build houses, to get public sector employers out of their recession-era mindsets to hire and pay more, and more generally, to ensure that millennial family needs are met by the public and private sector. The way to resolve a supply shortage in this case should mean creating more supply. Rather than hiking interest rates, the federal government should find ways to add construction workers, perhaps via worker training programs or immigration reform.

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But that’s unlikely to be the path policymakers go down. And in fact, we’ve been here in the past. Outside of the late 1990s, the only other time in the past 50 years we’ve had sustained low unemployment was the mid to late 1960s. At that time we had a half million troops in Vietnam, and President Lyndon Johnson was implementing his “Great Society” social programs. It’s also when a young baby boomer generation was looking to form households. What happened next? Inflation began to spike. Given the choice between meeting the needs of young baby boomer households and fighting inflation, policymakers chose to fight inflation, delaying the household formation of baby boomers for years.

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