This is why the unemployment rate, most recently hitting 6.4 percent, has continued to rise. The creators of jobs, namely businesses, have barely expanded thus far. If that weren't bad enough, there's a second barrier to job creation. Namely, the nation's productivity rate, or output-per-hour, which has increased at a 2.4 percent yearly pace since 1994. That's nearly twice the rate of productivity gains registered in the prior three decades.
True, business recoveries always register growth that is well above the nation's long-run potential to grow. Over 30 years ago, a smart Washington economist named Arthur Okun (a Democrat, by the way) coined the term Okun's Law, which stated that the potential of the United States to grow was 2.7 percent yearly. So economic growth below Okun's 2.7 percent would generate rising unemployment, while growth above that benchmark would reduce unemployment.
So in some sense, President Bush has even more work to do to bring down the unemployment rate, because Okun's Law would pinpoint today's economic growth potential at roughly 3.5 percent -- 2.4 percent productivity plus 1 percent labor-force expansion. This is almost a full percentage point higher than the old DMZ line. More, it's a burden that comes on top of terrorist attacks, war, energy shocks, bad weather, gross corporate malfeasance and -- until recently -- a monetary policy that kept the nation dangerously close to deflation.
And that is precisely why the president is right to prescribe a stronger-than-usual dose of tax-cutting. In the longer run, the aforementioned productivity rise -- itself a product of strong capital investment leading to dazzling technological advances -- is a very good thing for the economy and the workforce. Indeed, the biggest beneficiary of investment-led productivity gains is the higher real wages received by American white- and blue-collar workers, whether they own capital or not.
But in the shorter run the productivity record sets a high economic hurdle over which the Bush economy must leap in order to add to the job force and reduce the unemployment rate.
But leap it will, as illustrated by the other supply-side presidents who preceded President Bush into office. Though declining unemployment may not come until later this year or early next, the huge stock market rally now in tow is telling us that Bush's tenure will in fact follow in the footsteps of Reagan, JFK and the others who charted a similar economic course.
Liberal banshees beware.