Reframing the jobs picture

A mixed picture on American jobs is just the latest signal that Washington must be extra cautious as it switches from halting the panic slide in the US economy to shrinking the strong government hand in a recovering market.

In May, the unemployment rate reached a 26-year high – jumping from 8.9 percent to 9.4 percent. Yet the number of nonfarmworkers laid off – 345,000 – was surprisingly lower than expected. Even as many households suffer without a breadwinner, the US has now seen a multimonth slowdown in layoffs – a sign of a recovery in the works.

What's Washington to do with such contrary data while it keeps pumping the bellows to stoke the economy's still-weak embers?

Also befuddling: Only about 8 percent of the federal stimulus money has been spent so far. It may be that the Federal Reserve's rescue actions and the market's own self-cleansing have largely turned the tide in stock prices and other indicators.

How much more stimulus cash should be spent if the recovery strengthens? Congress needs to debate that question soon.

And then there are signals from financial markets – as well as complaints from China and Germany – that the Federal Reserve must worry about the inflationary impact of having printed so many dollars and injected so much money into banks.

The Fed has more than doubled its outlays in the past year to save the credit markets. All that money will need to be reeled in as the economy recovers.

Do it too slowly and inflation rises. Too fast and the recovery falters.

Given that the Fed got it wrong in 2004-05 by not raising interest rates quickly enough to prevent a housing bubble, investors are right to worry. They are already demanding a higher return in buying US Treasury bonds, in part out of a fear of inflation. Rates for 10-year Treasuries have jumped nearly 80 percent since December, the fastest rise in 15 years.

Also worrying is the Fed's move to go beyond its traditional role in boosting banks to helping government borrow money. In March, it began to buy $300 billion in Treasury bonds and other debt (the European central bank is taking similar action). This is a practice that puts a burden on future taxpayers and could drag down the economy.

It also brought an unusual rebuke from German Chancellor Angela Merkel: "We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years' time." China, too, openly demands more certainty from Washington that its $1.8 trillion in dollar-based assets won't be eroded by American inflation.

Fed chief Ben Bernanke ignores such complaints. Rather than fret over inflation, he worries that Congress and the Obama administration will raise the budget deficit too high and choke off economic growth. He boldly told lawmakers this week that he will not print more money to help their spending.

The Congressional Budget Office estimates that net government debt will rise to 65 percent of the gross domestic product at the end of fiscal year 2010, from 41 percent in 2008. And it could reach 82 percent by the end of the next decade.

That last number is more akin to a banana republic than an economic superpower.

President Obama needs to be forceful in reining in spending, especially in the most worrisome entitlement: healthcare.

This week, he asked Congress to cut $200 billion to $300 billion more from Medicare and Medicaid over the next decade. That would be in addition to the $309 billion in savings he already seeks.

But a bigger rethink of entitlements is needed soon to help make sure a budding economic recovery reaches full bloom.

Washington must soon figure out how to switch from being the economy's rescuer to being its reformer.