January 6, 2006

January 6, 2006 | WebMemo on Economy

The Silver Lining of 2005: Jobs Boom Should Protect Tax Reform

The year 2005 will be remembered as a rough one for Republicans, and understandably so. Conservatives were first frustrated, and now appalled, by the so-called Republican revolutionaries who promised to downsize the government and streamline Congress but have instead produced more pork, more partisanship, bigger deficits, and now we learn, the same special-interest lobbying scandals of yore. When conservative activists fought for conservative causes like Social Security reform and estate tax repeal, politicians failed to produce permanent legislation in Congress. President George W. Bush, who has championed these causes, suffered setback after setback and bled political capital all year long. So there is plenty for conservatives to be depressed about.

 

But for other reasons, 2005 was a great year, and here's why.

 

First, economic perceptions will only improve. Low approval ratings for President Bush and economic pessimism have nowhere to go but up, especially considering that the negatives were shaped by rare events like hurricanes Katrina and Rita. Indeed, initial reports of a net loss of 35,000 jobs during the hurricane-heavy month of September were revised not once, but twice, and now the Bureau of Labor Statistics (BLS) reports that there was a 17,000 net gain of payroll jobs during the month. Perceptions will inevitably catch up with reality, but will the administration use its momentum to pursue pet projects or to restore basic spending discipline?

 

Second, the economy was strong. Critics have no credibility if they carp that the economy was weak in 2005. Americans are waking up to the fact that despite years of hearing that the sky is falling, the U.S. economy is actually stronger than ever. No, the dollar has not collapsed. No, outsourcing has not slowed the American jobs machine. No, higher interest rates and a surge in the price of oil did not burst the housing bubble or diminish aggregate demand.

 

Third, job creation was robust. Productivity and GDP growth are robust for the year, but the most important measure for the voting public is jobs. Yesterday the Labor Department reported the lowest number of weekly initial jobless claims in five years. This statistic is a key leading indicator for the future. BLS published the final monthly jobs report for 2005 today, with the following highlights:

 

  • Unemployment dropped to a rate of 4.9 percent in December 2005, down 0.1 percentage points from last month and down from an average rate of 5.5 percent in 2004.
     
  • During 2005, 2.0 million new payroll jobs were created, and the total number of workers rose by 2.6 million. In December, the preliminary data indicate an additional 108,000 payroll jobs, just enough to keep up with population growth. The big surprise is that November job gains were revised upwards to 305,000.
     
  • Job gains were broad-based across all sectors. Some 90 percent of job gains in 2005 were in the service sector, which is where more than 80 percent of Americans work. The economy created half a million new jobs in professional services, 360,000 in private health and education, 240,000 in leisure and hospitality, 26,000 in trade and transportation, 19,000 in finance, and even 10,000 teaching jobs at the local level.

Jobs Boom May Save Tax Reform

In the battle of ideas, the strong economy of recent years is a vindication of the economic policies of lower taxes and lighter regulation, both of which have been embraced by President Bush. His signature economic issue has been tax cuts, which stimulate incentives to work, save, and invest. And the net result economically is that employment is up significantly from when he took office.

 

For those who see the budget deficit as an economic threat, there are only two solutions: higher taxes or lower federal spending. The jobs boom of 2005 effectively takes tax hikes off the table. Indeed, Congress should take the initiative to make the temporary tax reforms of 2003 permanent. That means cutting spending is the only game in town and will be the measure of real leadership in 2006.

Tim Kane, Ph.D., is the Bradley Research Fellow in Labor Policy in the Center for Data Analysis at The Heritage Foundation.

About the Author

Tim Kane, Ph.D. Visiting Fellow
Center for Trade and Economics (CTE)