Elijah of the economy

The Wall Street Journal

Readers may recall that chief White House economist Greg Mankiw was widely ridiculed in February for predicting that the economy would create 2.6 million new jobs this year. John Kerry joined the political fun, noting at the time that "George Bush is saying he's going to create 2.6 million jobs this year alone - and his advisers are saying, 'What, you didn't actually believe that, did you?'" Well, who are we supposed to believe now? Friday's May job report shows that the U.S. economy has created 947,000 new jobs in the last three months, 1.2 million since the beginning of the year. Mankiw seems to have been muzzled by the White House, so we'll say what he can't: That's a faster rate than Sen. Kerry's campaign promise to create 10 million jobs in his first term.

Friday's numbers also show that the death notices for U.S. manufacturing were much exaggerated. That sector added 32,000 new jobs, its fourth consecutive month of growth and the strongest employment gains in six years. The trend seems likely to continue because the Institute for Supply Management's manufacturing index, a leading indicator, is near the two-decade high hit in January, and the employment reading hasn't been this good since 1973. By the way, government employment fell by 27,000 in May - finally.

Recall that it was also Mankiw who had the temerity to note that "outsourcing" is probably good for Americans. That didn't play so well at a time of hysteria about the loss of software jobs to Bangalore. He was right about this too.

Outsourcing of manufacturing work, otherwise known as trade, has been with us since time immemorial. Over the past four decades U.S. imports as a percentage of GDP have risen to about 14 percent from 4 percent. But over the same period U.S. unemployment has remained at the same level, rising or falling somewhat with the economic cycle. The real change wrought by all of this expanding trade has been a rise in real incomes, which is something to cheer.

There is no rational reason to think that trade in services will be any different. The United States has a strong comparative advantage in services, as demonstrated by its healthy service-trade surplus. Some of the lower-end service jobs will migrate overseas, and that means that our schools have to do a better job of preparing Americans for higher-paid jobs that require more skills.

Already in this expansion it's clear that workers with a high school diploma or college education stand a much better chance of finding a job. The jobless rate for high school grads is 5 percent - lower than the overall national rate of 5.6 percent - while the rate for dropouts is 8.8 percent. The politicians and union officials who tolerate dropout rates of 50 percent in big city public schools are the real outsourcing villains.

All in all, the job numbers suggest that maybe it's time for the White House to release Mankiw from his media quarantine. By Washington standards, he's a prophet.