The U.K. Elections, Not U.S. Jobs, Caused the Market Rally

U.S. stock markets jumped for joy on Friday, with the Dow up almost 1.5%. However, this was not because of the April employment numbers, which were mediocre at best. No, the U.S. market surge was propelled by the results of the U.K. elections. The Conservatives, who espoused tax cuts, won a decisive (and, to the pollsters and pundits, shocking) victory over a collection of parties that promised to fight inequality via tax increases on "the rich."

Jude Wanniski, the author of The Way the World Works, would not have been surprised by the Tory victory. Wanniski's "political model" postulates that if voters are given a choice between economic growth and income redistribution (i.e., government-enforced "equality"), they will choose growth. The U.K. economy has been growing under the Conservative-led coalition, so the British electorate moved to cement in place the Conservatives' (relatively) pro-growth policies, by giving them an absolute majority in Parliament.

On this side of the pond, the U.K. election results inspired hopes that the Republicans will get the message, and make economic growth, rather than spending cuts or "inequality," the focus of their 2016 election campaigns.

But wait! Wasn't Friday's "Employment Situation" report from the Bureau of Labor Statistics (BLS) surprisingly good, with the BLS' "Establishment Survey" showing that 223,000 new payroll jobs were added?

No, it wasn't. The picture of April painted by the BLS' "Household Survey" was much less rosy. The Household Survey numbers showed an increase in total employment of 192,000 during April, but part-time jobs went up by 198,000, which means that the number of full-time jobs actually fell by 6,000. FTE* jobs rose by only 93,000, which was not enough to keep pace with population growth. As a result, the nation moved 18,000 FTE jobs farther away from full employment.

The April Household Survey numbers were consistent with the 1Q2015 GDP numbers that were published on April 29 by the Bureau of Economic Analysis (BEA). Economic growth ground to a halt in early 2015, and you can't have jobs growth without GDP growth-at least not for long.

According to Wanniski's political model, the electorate as a whole knows everything and understands everything-including economics. U.K. voters displayed this understanding during last week's elections, by giving the Conservative Party, which was the only one of the five major parties that was in any way pro-growth, a decisive win.

Analytically, it is clear that economic growth is the only thing that really matters. RGDP growth averaged 3.73% during the first 224 years of American economic history. If economic growth during this period had been at the Obama recovery's 2.24% average instead, our 2014 GDP would have been only $682.6 billion, less than 4% of what was actually achieved.

At 2.24% growth for 224 years, U.S. RGDP per capita in 2014 would have been $2,133, instead of $54,432. This would have put us slightly ahead of Uzbekistan. In this light, ask your friendly neighborhood liberals whether any of their "tax the rich" income-redistribution schemes could possibly do the middle class as much good as would an additional 1.49 percentage points of economic growth.

Only rapid, sustained economic growth can produce full employment and rising real incomes. At the end of 1Q2015, America was 13.9 million FTE jobs away from full employment. If all of these people had been working at average jobs, annualized 1Q2015 GDP would have been $1.82 trillion (10.3%) higher, and the federal budget would have been nearly in balance.

Unfortunately, it takes capital investment to create jobs. It would take an additional $4.23 trillion of nonresidential assets to support 13.9 million additional average FTE jobs. There is plenty of capital available in the world, but, under our current monetary, tax, and regulatory policies, investors are not willing to devote any more of it to creating U.S. assets than they are doing now.

If America is to have full employment and rising incomes, our policies must change. Given that the Democrats have become obsessed with fighting inequality via tax hikes on "the rich," the only hope for change lies with the Republicans.

Last week, the British electorate voted for economic growth, and against growth-killing tax hikes. If the Republicans unite around an economic growth message, and the Democrats continue to beat the "inequality" drum, Jude Wanniski's political model would predict a Republican landslide in 2016.

*FTE (full-time-equivalent) jobs = full-time jobs + 0.5 part-time jobs