INTRODUCTION

In retrospect, the Biden Administration ran an unprecedented political economy experiment: What happens when a massive jolt of investment spending runs into historic levels of immigration? The outcome turned out to be an odd and confusing mixture of good news and bad news that no one expected. Gross domestic product and employment both soared well above pre-pandemic forecasts. These strong headline macroeconomic indicators gave many Democrats a false sense of security going into the 2024 election.

But despite the unanticipated strength of hiring, real wage growth slowed to a crawl. In its August 2019 economic outlook, the Congressional Budget Office had forecast that private sector wages and salaries, adjusted for inflation, would rise by about five percentage points over the next five years. In fact, by this measure, real wages did not rise at all from 2019 to 2024 — a “wageless economic boom” that soured many voters on Democratic candidates.

Real wages surged during the early days of the pandemic, fell during the inflationary period, and then started to climb again. But, surprisingly, the gap between the projected real wage and the actual real wage did not narrow in 2023 and 2024.

What happened? The obvious answer is inflation. Rising prices for food, energy, housing, and other essentials created a cost-of-living crisis, which eroded real wages. As PPI has written, the surge in inflation was at least partly due to high levels of government spending, including Biden’s hallmark investment legislation.

But government spending alone doesn’t explain the inability of wages to keep up with rising prices, which had such an impact on the election. All other factors being equal, after the initial inflationary shock, strong job growth and lots of job openings should have allowed workers to negotiate higher wages with employers. Instead, wages showed a weak response to inflationary pressures.

So why did real wages not rebound faster in 2023 and 2024? The Federal Reserve’s attack on inflation by raising interest rates is likely part of the cause. But GDP growth stayed strong, and the economy never came close to recession.

Given the timing, one important potential contributor to the real wage slowdown is the historic surge of immigration in 2022, 2023, and 2024, which added millions of new workers to the labor market in a short period of time. New estimates from the Census Bureau, released in December 2024, confirm that foreign-born immigration soared to over 2.5 million in 2023 and over 3 million in 2024.

BLS data shows that foreign-born workers accounted for 89% of employment growth from 2019 to 2024. And a May 2024 paper from the Federal Reserve of Kansas City draws a link
between immigration and wages, at least for the post-pandemic period:

….Industries and states that experienced larger increases of immigrant workers tended to see more deceleration in mean hourly earnings growth rates between 2021 and 2023.

Let’s be very clear. PPI believes that, in the long run, increased legal immigration represents a clear positive for the country in both the economic and social sense. We strongly support expanding pathways for legal immigration to help meet America’s future demographic, workforce, and innovation aspirations, while taking sustained action to minimize illegal immigration in a manner consistent with our values. This balance is necessary for keeping America the vibrant, resilient, and robust culture and nation it is today.

However, it’s increasingly clear that Democrats made a huge political mistake in the 2024 election by not acknowledging the short-term economic impacts of historic levels of immigration. This policy brief will draw connections between the time path of real wages, the unexpected immigration surge of 2023 and 2024, and the outcome of the 2024 elections. We will not be discussing here whether the Biden Administration should have followed different investment spending or immigration policies. These are complicated questions that require weighing a variety of short-term and long-term benefits and costs.

Rather, our goal is to offer a possible explanation of the divergence between the rosy headline macroeconomic indicators in 2024 and the consistent negativity of voters about their economic prospects. This negative real wage shock amplified voter concerns about issues such as immigration, trade, technology, and housing. Immigration is especially important for understanding the election.

We can’t say for certain that the weakness in wage growth in recent years was caused by the latest surge in foreign immigration. Whether or not immigration was responsible for slow wage growth during this period, voters do not think like economists. As such, it is not surprising that many made a connection between the immigration surge and the weakness in real wages, given what they see in their daily lives.

This analysis has several political implications. First, voters were not suffering from misinformation when they blamed Biden for the economy. People knew that their real wages and real incomes were below pre-pandemic trends, and they resented the Democrats telling them how well they were doing.

Second, Democrats likely were held accountable not simply for the 2021-22 inflationary surge but for the inability of real wages to recover back to trend in 2023 and 2024. Third, this analysis offers insight into what could have been done better and how Democrats can avoid the same pitfalls moving forward. In particular, Democrats need to use real wages to help set a political context for policy goals. This time, the issues were government spending, inflation, and immigration. In the next election, the key issues may be different. But taking changes in real wages seriously will help align Democrats with the concerns of working Americans.

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America has long had a reputation as the land of upward mobility and equal opportunity. In recent decades, however, the United States has scored lower on measures of social mobility than many other economically advanced countries. This decline in upward mobility is driven by a stark inequality of opportunity early in Americans’ lives.

Regardless of their merit, many Americans often don’t have access to the opportunities they need to succeed, or must pay a heavy price for the same opportunities that their wealthy peers often get at no cost. Young adults from disadvantaged backgrounds might lack assistance paying for education without relying on burdensome debt or generous scholarships, struggle to secure well-paying job opportunities and professional connections, or be unable to rely on family help to cover emergency costs.

Compounding the problem is a low level of financial capability, also known as financial literacy. According to a survey by the Global Financial Literacy Excellence Center, respondents could give correct answers to a set of basic financial questions about saving and investing only 48% of the time. Financial literacy is especially low among the young, who have little experience with financial decision- making. This makes them particularly prone to making poor financial decisions early in life, which can set them back for years. Put together, unequal access to opportunity combined with low levels of financial literacy limit social mobility for children in low-income families.

As a result, many Americans remain stuck on the lower rungs of the economic ladder through no fault of their own. Remedying this inequality is not merely a moral problem, but an economic one. Talent is more evenly distributed than opportunity. Amongst the millions of Americans who lack promising opportunities or financial stability could be the founder of the next great American company or a scientist behind the next medical breakthrough. All young Americans should have the opportunity and habits to build a successful and financially stable future for themselves.

Child Development Accounts (CDAs) are one potential tool to address these problems. CDAs are accounts designed to help children and their families, especially low- and middle-income ones, build wealth for the future. Countries around the world, such as Singapore and Israel, have long had formal CDA policies. Several U.S. states, including Oklahoma, Maine, and Rhode Island, have also pioneered their own programs and found some success in improving opportunity and financial literacy for participants. There are also many proposals to establish CDA-like accounts at the federal level, the most prominent of which is a “baby bonds” proposal sponsored by Senator Cory Booker and Congresswoman Ayanna Pressley. However, as detailed more throughout this report, this plan is expensive, relies on accounting gimmicks to create the false appearance of wealth creation, and does little to help children build financial capability to grow wealth on their own.

PPI proposes instead to create “Child Opportunity Accounts” (COAs) that would better promote equal opportunity, self-sufficiency, and financial capability for all children. As the first section of the paper explains, these accounts would be universal: every child would receive an account at birth with a $700 balance, automatically invested in a diversified investment vehicle. Then, every year on the child’s birthday up to their 16th birthday, the government would make additional contributions of up to $700, depending on a household’s income. The universal provision of accounts provides all children a shared educational experience building wealth at relatively low cost to taxpayers, while the means-tested annual contributions ensure the most financial assistance goes to children whose parents would otherwise struggle to give them the same “starting capital” in life as their wealthier peers.

The next section focuses on how the accounts would help children and parents acquire the financial understanding and habits to effectively manage their assets. To help young Americans build financial capability, information about important topics would be embedded into the access portals for the accounts, and account holders would be required to pass a financial literacy assessment before accessing their funds at adulthood. This financial education can occur both in formal classroom settings and via informal family socialization.

This report then examines how account holders can use their COA savings to pursue opportunities, laying out allowable uses for withdrawals and guardrails to ensure they do not exhaust the account balance too quickly. Young adults would be permitted to withdraw up to 25% of the balance per year between ages 18 and 25 to use for a number of “qualified uses,” including education, health care, starting a business, a down payment for a house or car, select moving expenses, and/ or saving for retirement. Once they have reached age 25, account owners would be able to withdraw the remainder of the funds without adhering to the 25% limit. The report also explains how COAs can help establish a civic compact for America’s youth that reinforces their responsibility to positively give back to the nation, rather than merely acting as a new entitlement.

Finally, PPI offers several fiscally responsible options to pay for these accounts, so that the wealth they build for young Americans won’t be canceled out by a higher public debt burden that they will be forced to service. One particularly fitting pay-for, which PPI detailed in another major report last month, is reforming the taxation of inheritances. This pair of policies would work in tandem to equalize opportunity by taxing the birthrights of people born in the richest 1% of households to give every American child a birthright of their own. And unlike other welfare schemes, this combination of policies would neither give handouts to adults who could otherwise have earned the money themselves nor confiscate a single penny that someone earns through their own hard work to pay for it.

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