by Larry Kudlow
September 1, 2006
The August jobs report should put to rest any fears that the economy is burning out. Following upwardly revised increases for June (134,000) and July (121,000), companies added 128,000 nonfarm payrolls last month. Meanwhile, the all-important but rarely mentioned household survey of people working gained by 250,000, sending the unemployment rate back to 4.7 percent from the July reading of 4.8 percent.
The cult of the bear, fussing about a housing-related recession, has once more been proven wrong.
When you step back from the short-term ups and downs of the monthly data, what you see is a return to normal jobs growth. This follows a brief lull earlier in the decade, caused by a shallow recession and a series of adverse economic shocks: a tech bubble that popped, terrorist bombings, war, and an unusual spate of corporate malfeasance.
Long-term jobs growth has moved to an all-time high of 145 million in the household survey and 136 million in nonfarm payrolls. Both measures are rising at about 1.5 percent, the average for jobs growth dating back to 1995. As for unemployment, at 4.7 percent it is well below the 5.1 percent long-run rate.
This suggests we are near full employment and that the economy is operating close to its full potential to grow. It’s still the greatest story never told.
In a speech last week, Federal Reserve chair Ben Bernanke was bullish on the outlook for productivity, a vital economic stimulant. He cited rapid technological advances as a key driver in the new economy, noting that productivity gains have spread from information technology to other major sectors such as retail, financial services, and manufacturing — all heavy users of technology.
Nonfarm productivity has increased an average 2.5 percent annually for ten years. Labor force participation has been growing slightly better than 1 percent annually. Putting the two together, you get a 3.5 percent rate of potential economic growth. The latest GDP report shows 3.6 percent growth over the past year, down slightly from the near 4 percent pace of the past three years.
Bernanke also noted that while Japan and Europe have access to the same technology we do, they have grown at a much slower pace. The principal reason for the gap? Economic policy. Bernanke outlined the U.S. edge in terms of deregulated labor markets, greater competition, lower barriers to entry for new firms, more sophisticated capital markets, and the enlarged role of research universities in fostering economic-empowering innovations.
A serious omission from Bernanke’s list, however, was tax policy. Total marginal tax rates for the U.S. workforce are substantially lower than in Europe and Japan. In particular, the 15 percent tax rate on investment (capital gains and dividends) put in place by President Bush (following President Clinton’s cap-gains tax cut from 28 percent to 20 percent) has given tremendous torque to productivity, job creation, and economic growth.
Capital formation is the key to worker productivity and consumer prosperity. Visionary entrepreneurs, those who discover new technologies or innovate those that exist, must be financed with capital. In the longer term, capital-induced productivity increases lead to greater wage gains and enhanced consumer spending power.
This is precisely what separates the men from the boys in the world economy.
Despite all this, the economic Left is rebelling against the Bush prosperity. Along with articles in the New York Times and Washington Post, the Economic Policy Institute released a Labor Day study complaining that while productivity has increased 33 percent over ten years, real wages have declined since 2000.
But this neglects a broader measure called total compensation, which includes tax-free retirement and health benefits. Across the 2000-05 period, inflation-adjusted total compensation has increased 13.1 percent, and over ten years has advanced 31.8 percent, in line with the productivity rise. That’s a bright picture.
It’s okay to have a pessimistic point of view. But it’s not okay to cherry pick data in order to reveal a worst-case Bush-bashing scenario. It’s equally pathetic when the class warriors on the Democratic left can only carp about one alternative proposal: raise taxes on the rich.
This political loser has relegated the Democratic party to secondary status for twenty-five years. Just take a look at the exit polls from the 2004 election. President Bush carried 49 percent of those earning between $30,000 and $50,000, 56 percent of the $50,000 to $75,000 earners, and 55 percent of the $75,000 to $100,000 earners. Meanwhile, 41 percent said Bush’s tax cuts were good for the economy, as opposed to 32 percent who said they were bad.
Tax cuts are a winner. They throw off benefits across the board: capital formation, profitable business, job gains, wage increases, and consumer spending power.
You’d think the Dems would learn. But they never do.
— Larry Kudlow is host of CNBC’s “Kudlow & Company”, economics editor for National Review Online and a nationally syndicated columnist. He served in the Reagan Administration and on the Bush-Cheney transition team.