Politics & Policy

Mankiw’S Magic

The White House economist talked big jobs numbers -- and he was right.

Friday’s job report shows that White House economist Greg Mankiw was very nearly right when he projected almost a year ago that jobs could rise by 2.6 million in 2004. Of course, he was widely ridiculed inside Washington after making this statement, and at one point even the White House turned its back on the Harvard professor’s estimate.

But the Labor Department’s latest employment release shows the yearly gain for nonfarm payrolls coming in at 2.3 million. That’s close enough for government work. It’s also the best jobs performance in five years.

Why so good? The labor market responded powerfully to lower personal tax rates. As workers were able to keep more of what they earned, the unemployment rate declined from 6.3 percent to 5.4 percent. A full 2.5 million jobs were added since August 2003.

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, nonfarm job additions averaged just under 200,000 per month. At this rate, 2005 will be another banner year for employment and economic growth.

A recent study by the Atlanta Federal Reserve estimates that only 98,000 new jobs per month are required to keep unemployment under control. The reason? Labor-force participation has declined somewhat as more students remain 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 5 percent. Outside of the bubble economy of the late 1990s, 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 percent or lower unemployment, the 4 percent growth rate of the economy will spur a flood of new individual tax collections at lower tax rates. Hence, another economic surprise of 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.

— Larry Kudlow, NRO’s Economics Editor, is host with Jim Cramer of CNBC’s Kudlow & Cramer and author of the daily web blog, Kudlow’s Money Politic$.


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