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The Goldilocks Solution

June 13, 2004

The nearly 1 million jobs added during the last three months could help keep President Bush from becoming the first president since Herbert Hoover to finish his term with fewer jobs than when he began. Yet the job creation machine has yet to make a dent in the overall unemployment rate, because so many out-of-work Americans now are trying to climb back into the workforce. Those fortunate enough to still have their jobs are starting to wonder how they will make ends meet, given the soaring cost of necessities including housing and healthcare, gasoline and milk.

As the Federal Reserve starts the inevitable process of pushing interest rates up to combat inflation, it has to keep the unmet need for more jobs and stronger paychecks in focus. For one, not all states are benefiting equally from the national rise in jobs. The California jobs creation report for May, to be released Monday, could provide evidence that this slow-to-recover state finally is catching up to the national jobs creation rate. Economists say Ohio, Michigan, Pennsylvania and West Virginia are still in recession and could remain there into November.

That increases the pressure on the Fed to find what economists call the Goldilocks solution -- the just-right level of interest rates to snuff out inflation without stalling economic growth. It's a tough task during a normal economic cycle, made tougher now by the ongoing war that could cause worried consumers to rein in spending. And that task could become nearly impossible if terrorists succeed in disrupting U.S. oil supplies for any length of time.

It is frustrating that, even though corporate profits have been fairly strong in recent months, many employers remain skittish about hiring. During a speech last week to world bankers, Fed Chairman Alan Greenspan cautioned that the number of temporary employees being hired had been unusually large, "suggesting that business caution remains a feature of the economic landscape." The closely watched University of Michigan consumer confidence survey dipped in May on fears that higher interest rates and inflation would eat away at paychecks that had grown only modestly in recent years. The large pool of unemployed workers continues to hold down salary costs.

The Bush administration claims that its controversial tax cuts sparked the economic recovery and the welcome wave of new jobs. The truth is always more complex, and it is just as easy to argue that rising national debt is restraining what would otherwise be a robust natural recovery.

What is most certain about the tax cuts is that the deficits they continue to create will burden the next generation. The Federal Reserve can do little to affect that depressing reality.

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