Mankiw's Magic
By Ludlow's Money Politic$
Today’s job report shows that White House economist Greg Mankiw was very nearly right when he projected almost a year ago that 2004 jobs could rise by 2.6 million. He was widely ridiculed inside Washington and at one point the White House itself turned their backs on the Harvard professor’s estimate. But today’s employment release shows the yearly gain for non-farm payrolls coming in at 2.3 million. Close enough for government work. It’s the best jobs performance in five years.
In fact, the labor market responded powerfully to lower personal tax rates by gaining 2.5 million jobs since August 2003. As workers were able to keep more of what they earned, the unemployment rate declined to 5.4% from 6.3%. Mainstream economists continue to scoff at the economic power of lower marginal tax rates. But once again a supply-side experiment worked. For all of 2004, non-farm jobs averaged just under 200,000 per month. At this rate, 2005 will be another banner year for employment and economic growth. A recent Atlanta Fed study estimates that only 98,000 new jobs per month is required to keep unemployment under control. The reason? Labor force participation has declined somewhat as more kids stay in school, more workers take early retirement, and more moms stay home to have kids and attend to child care. With this study in mind, it is possible that this year’s unemployment rate could dip below five percent. Outside of the late 1990’s bubble economy, this would mark the lowest unemployment rate since 1973. Declining unemployment also signifies lower federal spending on unemployment benefits and other small-scale entitlement payouts. Additionally, at 5% or lower unemployment, the 4% growth rate of the economy will spur a flood of new individual tax collections at lower tax rates. Hence another economic surprise in 2005 will be a pronounced decline in the Federal budget deficit. As stock market appreciation throws off more tax collections from investor dividends and capital gains, even at these lower tax rates the budget deficit will decline even more. America’s cowboy capitalism, to borrow Europe’s derisive term, is hatching yet another economic boom. |
