The slow pace of job creation is clearly the most serious political and economic problem in the country today. Although Democrats and the press continue to focus on Iraq, President Bush and congressional Republicans know that the sluggish economy is a far greater threat to their re-election than anything going on in the Middle East.
Unfortunately, there really is not much of anything Congress or the White House can do at this date that will significantly affect the economy before Election Day. Taxes have already been cut twice, government spending for defense and unemployment compensation is pumping money into the economy, and the Federal Reserve has dropped interest rates to historical lows. There simply isn't anything else that realistically can be done. And even if there were, given the time it takes for policy changes to impact on the economy, anything that was done today would likely not register until after the election.
Ironically, the biggest barrier to job growth is something economists normally applaud: high productivity. In the second quarter of this year, output per hour in the nonfarm business sector was up 6.8 percent. In 2002, productivity increased 5.4 percent. These numbers are twice or more than the historical trend.
When productivity is high, it means that producers are able to increase their output without having to hire more workers. Given the high overhead costs for hiring workers in today's economy, companies have been substituting computers and machines for people. This allows the remaining workers to be well paid, but reduces the demand for labor. People now worry that this trend will continue, and fewer and fewer workers will be required to produce what is needed, with the result that unemployment will stay high indefinitely.
This is not a new concern. Economists have been worrying about it for more than 200 years. Although it remains a theoretical problem that economists continue to wrestle with, experience shows that it is not a concern. Higher productivity, whether resulting from mechanization, automation or managerial improvements, has always led to more employment, not less.
Adam Smith was first to draw attention to the employment effects of productivity increases. In "The Wealth of Nations," he tells his famous story of the pin makers. Smith noted that pins were very expensive in those days and had to be manufactured by hand. So laborious was the process that one man could barely manufacture one pin per day working by himself.