Column - Jobless recovery? Try again

Thursday, April 15, 2004

By Larry Kudlow

Economics editor of

National Review Online

Co-host of CNBC's Kudlow & Cramer

The blowout new-jobs number of 308,000 for March puts the lie to political charges by the Kerry Democrats that the United States is in a jobless recovery. This is the largest gain in monthly non-farm payrolls in four years.

What's more, for the first quarter of this year, 513,000 new jobs were created, with the Labor Department acknowledging significant upward revisions for the prior two months. At this pace, roughly 2 million new jobs could appear in 2004, a number that is certainly within shouting distance of the 2.6 million new jobs originally predicted by chief Bush economist Greg Mankiw. The administration walked away from this projection, but it should have kept its nerve.

Since 1970, the United States has created an astonishing 60 million new jobs. This calculates to 1.9 percent yearly increases in employment during a period of 3.2 percent annual gains in economic growth. If this employment trend continues, the level of non-farm payrolls will reach 132.1 million by the end of 2004 and 134.6 million by the end of 2005. Respectively, that equates to 2.1 million new jobs this year and 2.5 million in 2005. The nonpartisan career staff at the Bureau of Labor Statistics has already forecasted 20 million new jobs by 2012.

Undoubtedly, Mankiw calculated the numerous benefits of the 2003 Bush tax cuts when he first released his bold estimate. With tax rates slashed across the board on personal incomes, small businesses, investor dividends and capital gains, both investors and workers now get to keep significantly more of what they save and earn.

And when it pays more, after-tax, to work and invest, people do so. This is the incentive-reward effect that changes economic behavior. Since the tax cuts were implemented, the economy has grown at better than 5 percent annually, and the unemployment rate has dropped to 5.7 percent from 6.3 percent.

At the same time, broad stock indexes have gained roughly 35 percent, creating about $3.5 trillion of new wealth. The market value of all mutual funds has surpassed the prior peak reached in 2000. Along with rising home prices, family net worth has surpassed the record hit in early 2000.

This is beginning to look more like a traditional post-recession employment recovery. The March jump marks the seventh consecutive payroll jobs gain, for a total of 759,000 new hires, with 61 percent of U.S. industries reporting payroll increases -- the highest percentage since July 2000.

Even the gap between the lagging business payroll survey and the stronger household survey of "all" people working is beginning to narrow. The household survey appears to be more sensitive to self-employed workers who have started their own Subchapter S or LLC (limited-liability corporation) businesses. Responding to lower income-tax rates, these entrepreneurs have registered 1.8 million new jobs since the end of 2002.

The day before the recent big jobs announcement, a widely followed manufacturing index published by the Institute for Supply Managers registered its highest level since the end of 1983. Every industry group, including cars, electronics and business equipment, cited increases in new orders and production.

Despite all this, economic pessimists keep talking about the outsourcing of jobs to foreign countries as a major obstacle to employment and economic recovery. They're dead wrong. New data from U.S. international trade accounts show that there are more foreign companies investing in the United States to create new jobs here at home -- a process known as insourcing -- than there are American firms sending jobs overseas.

Analysts should take their blinders off and see how the combination of tax cuts and low interest rates, along with rapid productivity gains and a strong rebound in corporate profits, has once again put U.S. growth above growth in any other industrial country.

Sen. John Kerry, of course, wants to roll back the Bush tax cuts and penalize American corporations that sell to foreign customers abroad as well as U.S. consumers at home. While his tax-hike package effectively panders to left liberal interest groups inside the Democratic Party -- people who oppose free trade and wage class warfare on successful earners and investors -- it would have a devastating effect on economic recovery and jobs growth.

In a recent poll sponsored by the Duke University business school, 64 percent of chief financial officers of U.S. corporations believe that Bush's economic policies would raise gross domestic product more than Kerry's. Duke finance professor John Graham, director of the survey, said: "CFOs like free trade, they like low interest rates, and they like tax cuts. ... They don't like regulation and restrictions, but overall they think protectionism slows down economic growth."

The CFOs must also love the latest jobs number. Who, outside of the Kerry Democrats, wouldn't?

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