TIME europe

Can the E.U. Punish Russia for Crimea Invasion?

Belbek Ukraine March 04 2014Russian soldiers control Belbek airfield in CrimeaIn a graphic illustration of the standoff and its potential hazards, Russian troops on Tuesday fired warning shots in the air as approximately 200 unarmed Ukrainian soldiers approached Russian positions on the perimeter of the contested Belbek airfield in Crimea to press demands to return to their positions there and conduct joint patrols.
Russian soldiers at the contested Belbek airfield in Crimea on March 4, 2014 Yuri Kozyrev—NOOR for TIME

While the U.S. has been outspoken about Russia's incursion into the Ukraine, the E.U. has been somewhat quieter as it has more to lose

Russia’s power play in Crimea has left the European Union in a quandary. Officials in Brussels are scrambling to respond to the acts of aggression from its largest neighbor and third biggest trading partner. European leaders across the region have voiced concern over Russia’s Ukraine strategy, but when it comes to what the repercussions will be for its maneuvers, the message has been far from consistent. Much-mooted sanctions, which E.U. rules require unanimous agreement before imposing them, look unlikely with the bloc’s leading economy, Germany, wary of such measures.

Speaking ahead of an emergency meeting of E.U. foreign ministers on March 3, German Foreign Minister Frank-Walter Steinmeier cautioned Europe against responding to Moscow’s provocations with provocations of its own. “Diplomacy is not a sign of weakness but is more needed than ever to prevent us from being drawn into the abyss of a military escalation,” said Steinmeier. But even conflict-averse Germany shows signs of reaching the end of its tether: German paper Bild reported on Monday that German Chancellor Angela Merkel reportedly questioned if Putin “was still in touch with reality” on a call with President Obama.

So far the E.U.’s most overt response to Russia’s actions in Crimea has been a communiqué on Monday in which it demanded the “immediate withdrawal” of Russian forces to their bases. “In the absence of de-escalating steps by Russia,” the E.U. Council suggested it would discuss the possibility of suspending bilateral talks on visa matters and “further targeted measures.” It did not expand of what these further targeted measures may be, but in effect set a deadline for Russia to change its strategy ahead of a meeting in Brussels on Wednesday. On Tuesday Putin appeared to downplay tensions by saying there would be no war with Ukraine, but did not rule out any options for military intervention in the future.

The 28-member bloc has worked on building close ties with Russia over two decades. Russia is the E.U.’s third largest trading partner, while the bloc is Russia’s first largest trading partner. Germany, the E.U.’s leading economy, is the biggest importer of Russian gas and is Russia’s third-largest trade partner on its own.

Given the complexity of European ties with Russia, its response to the crisis has been more muted than the more confrontational statements of U.S. President Barack Obama and Secretary of State John Kerry. “The Americans are far away,” noted a top Germany diplomat, speaking anonymously to Reuters, “They have a lot less to lose from an escalation of this crisis.” The U.K. too has been careful to consider its own interests with Russia, despite its Foreign Minister William Hague warning Russia “there will be consequences” for its actions in Ukraine. The government faced criticism when on Monday an official document on possible responses to Russia was photographed; it reportedly included a suggestion that London would not close its financial doors to Russians given the scale of Russian assets and investment already tied up in Britain’s capital.

To further complicate the situation, the E.U., many of whose member states rely heavily on Russian oil and gas, is due to discuss the future of the continent’s energy policy later this month. With limited options on the table to immediately diversify Europe’s energy sources, the E.U. will likely continue to need access to cheap Russian fossil fuels. Yet there are some countries that have been willing to stand up to Russia despite their reliance on its energy, says Jana Kobzova, a Russia and Eastern Europe expert at the think tank European Council on Foreign Relations. “From Poland to Slovakia to the Baltic states, these are countries who are heavily dependent on Russia and who might be hurt if Russia cuts the gas supplies to the Ukraine, but they are still calling for a tough response,” says Kobzova. The idea of targeted sanctions and asset freezes of those close to Putin is also another strong option the E.U. could use to deter Russia, says Kobzova.

As the crisis continues, what is becoming increasingly obvious is that all sides have much to lose in the standoff. While individual E.U. member countries may have built up significant economic ties with Russia, Moscow is also gambling with ties to one of its most important markets. An estimated 75% of foreign direct investment stocks in Russia are from E.U. member states. If the E.U. chooses to leverage its influence there, it could be a gamble that works to its favor. As Dutch Foreign Minister Frans Timmermans suggested on Monday, “The consequences [of an escalation] will be bad for everyone, but for Russia they will be far worse than for the E.U.”

TIME Economy

China’s Leaders Need to Make Real Strides in Economic Reform, Not Baby Steps

A security guard stands in front of The Great Hall of the People before the upcoming opening sessions of the National People's Congress (NPC) in Beijing on Mar. 2, 2014 Wang Zhao / AFP / Getty Images

World markets are watching this National People’s Congress to see if Beijing will stop the endless tweaks and instead enact substantial policy change

China’s leaders get a lot of credit for announcing reforms. In November, economists swooned with praise when a Communist Party plenum unleashed a torrent of reform pledges, promising everything from easing the one-child policy to liberalizing capital flows to opening protected markets. Now, as we head into yet another major leadership confab, the National People’s Congress (NPC), which starts Mar. 5, everyone is waiting to see if President Xi Jinping and his team will offer any signs on how they intend to turn those pledges into real policy. As HSBC economists said in a recent note to investors: “All eyes will be on whether the authorities will walk the walk of reform after the talk.”

Many China watchers remain bullish that real change is afoot. Economist Jun Ma at Deutsche Bank after calling Xi’s announced reforms “unprecedented” in a recent report, went on to comment that “the leadership is fully committed to forcefully implementing these reforms.” The optimists were encouraged by a February meeting of the Central Leading Group for Overall Reform, formed to oversee the economic policy agenda, where Xi emphasized that “the starting of a race decides the second half of the race, and implementation is the key.” A report from BofA-Merrill Lynch listed out a long series of policies the investment bank expected to be discussed at the NPC, including steps to help local governments handle their excessive debt burden, expand more private ownership of state enterprises and strengthen the feeble pension system.

Yet at the same time, there is a widespread feeling that China’s leaders are doing a lot more talking about reform than reforming. Initiatives are being rolled out at a glacial pace; some important experiments, in financial liberalization for instance, are being confined only to a free-trade zone in Shanghai. Though the overall reform plan at last November plenum was bolder than many had expected, it was, at the same time, an outgrowth of the direction China has been following for years. Some of the proposed changes were long overdue (loosening the one-child policy) or have been repeated again and again (freeing up the currency) or were just plain vague (handing the private sector more power). Timetables were nowhere to be found.

Beijing has good reasons to go slow. There are dangers in pressing forward too rapidly. Throwing open the unprepared financial sector to the world too quickly would be potentially destabilizing. The history of China’s reform process shows that the leadership usually moves in baby steps and mini-experiments, which eventually add up over time to major change. What China has to do is not simple: Shift the world’s second-largest economy from a state-controlled, investment-led growth model to a private-led, consumption-heavy model. It can’t and won’t happen overnight.

My argument, though, is that China is just not making enough progress. The steps being taken are tweaking the existing economic system, not altering it in the fundamental ways that have become necessary. State-owned enterprises, bloated and inefficient, won’t become stronger as long as the government coddles, subsidizes and protects them from competition, for instance. The banks won’t allocate money more wisely – away from state-linked firms and projects and towards the more productive private sector – as long as the financial sector remains wrapped in government controls. But the reforms that would address these issues are crawling along. Despite expectations of change, interest rates are still highly regulated in ways that punish savers and favor investment. Since capital isn’t priced properly, consumption suffers while debt escalates. The longer these problems are allowed to fester, the more new problems will arise. That’s what happened with China’s shaky “shadow banking” sector, seen by many as a potential risk to the nation’s economic stability. Credit from trusts and other forms of alternative lending have exploded because companies and investors are trying to circumvent the overly fettered formal banking sector.

Caution is necessary but promises alone won’t ensure China’s growth miracle continues. Many economists expect China’s economy to continue to slow down this year as its current growth model sputters. I’d like to see China’s leaders start reshaping the structure of the economy in ways that will unleash its future potential, instead of just promising to do so. Baby steps are fine, but eventually the baby has to learn to walk on its own.

TIME real estate

A Robust Housing Recovery? Not So Fast

Hal Bergman—Getty Images

That’s a question I’m asking after reading some new housing data and real estate market studies out this week. The national numbers make it seem like we’re having a pretty good year for housing, which is one of the keys to overall economic growth in this country. (As Warren Buffett once told me, if you fix housing, you can fix the American economy.) And house prices did go up by a healthy 11.4 % in 2013, with the latest Case Shiller data showing an 8 –year high. So far, so good.

But two things concern me about the market right now. One, the new numbers are trailing indicators—house prices reflect where we have been, not where we are going. The second half of 2013 was weaker than the first, and the last few months of home sales in particular have been slack. That information will take about six months to trickle through into the official data, which is one of the reasons that the smart folks at Capital Economics believe that “2014 will mark a significant slow down in the pace of house price appreciation.” Despite the Fed’s “forward guidance” about keeping interest rates low for years to come, it will be interesting to see if the market buys it. The Fed can only control base rates, not market rates for mortgages, and if they start creeping back up, we may see a significant pull back in refinancing and mortgage applications as we did last summer. Less demand on that front would eventually mean lower prices.

But as in so many areas of the economy, the state of the market will depend very much on where you live. There’s a big, deep new study just out from the Conference Board’s Demand Institute, looking at the state of the housing recovery in 2200 cities around the country. That study finds that there’s a large and growing bifurcation in housing in America. The top 10 percent of cities in the country (ranked by the aggregate value of their owner occupied homes) now hold 52 percent of all housing wealth. Basically, we’ve got a 1 percent/99 percent phenomenon happening in housing, which has massive wealth implications for middle class Americans, who still hold the majority of their wealth in their homes.

For starters, if you are counting on using home equity as part of your retirement plan, you’d better hope you live in one of those top ten market; price increases will be three times greater in the strongest markets than in the weakest ones. Over the next five years, while national prices are estimated to grow only about 2 % a year between 2015 and 2018, some of the top markets are predicted to boom, while about 50 % of all housing markets are still trying claw their way back from the housing crash and Great Recession, with many still underwater.

Perhaps most interesting is the fact that while some markets simply have a natural home court geographic advantage (think prime East and West coast real estate), you can also craft housing policy that creates a more vibrant market, as cities like Hoboken, NJ have done. If housing continues like this, it will have big long-term implications for retirement and consumer spending. (Every dollar of new housing wealth has a much bigger impact on spending than wealth created in the stock market does.) Reason enough to bring bifurcation into the current discussions in Washington around housing reform, and creating a market in which all Americans, not just the richest, can get a 30-year mortgage at a decent rate.


A Step Backward for Labor

New 2012 VW Passat First Drive And Factory Tour
Line inspection workers check out a Volkswagen AG 2012 Passat at the company's factory in Chattanooga, Tennessee, June 1, 2011. Mark Elias—Bloomberg/Getty Images

Conservatives help block an innovative union plan at a VW plant

Union battles usually involve workers duking it out with management. But in the highest-profile labor-relations fight in recent years, the workers and management were essentially on the same side, and the battle was between the United Automobile Workers (UAW), one of the most storied unions in U.S. history, and local Republican lawmakers and conservative political supporters like Grover Norquist and the Koch brothers. They squared off over whether the UAW would be allowed to organize a VW plant in Chattanooga, Tenn., which would facilitate something the company desperately wanted–a “works council” allowing labor a say in all plant activities.

It’s a complicated tale that says a lot about how business works in the U.S. compared with places like Germany. There, big companies are not only unionized but also have works councils in which management and workers collaborate on things like schedules, furloughs, pay, expansion plans or which product lines a factory might make. The idea is for management and labor to work together on issues before they become problems. It’s a system that has made Germany into the export powerhouse that it is, and one that VW, the most profitable automaker in the world, has been desperate to implement in the U.S.

The problem is that under American labor law, you can’t have a works council without a union. And in Tennessee, Republican legislators as well as conservatives like Norquist and the Koch brothers have been waging a campaign to keep unions out. Over the past few months, Chattanooga has been blanketed with billboards paid for by groups like Norquist’s Center for Worker Freedom bearing slogans like Detroit: Brought to you by the UAW. On the second day of the National Labor Relations Board (NLRB) vote, U.S. Senator Bob Corker (a former Chattanooga mayor) raced into the city, claiming he’d received a tip from VW that if the union were rejected, a new SUV would be scheduled for production there. (The factory, which opened in 2011, currently makes Passats.) VW quickly announced that this was false, but no matter–right-wing talk radio grabbed Corker’s comments and fanned the antiunion flames. The vote was 712-626 against the UAW.

It was a bitter defeat, and yet the fact that the union got 47% of the vote made it by far the most successful organizing effort ever at a foreign automaker in the South, according to labor professor Harley Shaiken of the University of California, Berkeley. It also makes Chattanooga one of the rare VW plants worldwide that don’t have a works council. (Others can be found in China.) The vote hasn’t sat well with the company, which still hopes to find a way to have a council. (The UAW can’t organize activity or hold another vote for a year, though a different union can try to, which raises interesting possibilities.) Bernd Osterloh, head of VW’s main works council in Germany, issued an ominous statement about the future of the company’s expansion in the U.S.: “I can imagine fairly well that another VW factory in the United States, provided that one more should still be set up there, does not necessarily have to be assigned to the South again.”

I’ve heard from VW workers who felt frightened by conservative talk about job losses that might result from unionization, which may be a reason some voted no. I’ve heard from others within the plant who believe that VW was already offering such a good deal–starting pay is $15, a lot more than it is for many other blue collar jobs in the community–that workers simply decided not to risk rocking the boat. But the sad fact is that what started as an innovative new idea to improve labor relations and productivity turned into an ugly political mess. We need a new way to think about labor relations. Americans are often frightened by labor power because they believe that higher wages mean lost jobs. But this is a point hotly debated by economists, many of whom believe that the wealth-enhancing effect of higher pay would lead to higher consumer spending and thus higher economic growth. Certainly it’s true that as unions have declined in this country–membership among workers is only 11% today, down from a peak of 35% in the mid-1950s–wages have flattened for all Americans. Plenty of experts believe sluggish U.S. wage growth is a real problem in a country in which consumer spending is 70% of the total economic pie.

The UAW is considering appealing the result; U.S. labor laws would have barred any company in an NLRB vote from threatening workers’ jobs, but politicians were under no such stricture, which seems unfair. Workers are voicing their opinions in other ways. In the window of one truck in the VW parking lot, a pro-UAW sign has been replaced by another that reads, Bob Corker sucks.


Time to Put Trade Above Politics

U.S. Vice President Joe Biden Visits South Korea - Day 1
U.S. Vice President Joe Biden shakes hands with South Korean President Park Geun-Hye, right, during their meeting at presidentisl house on Dec. 6, 2013 in Seoul, South Korea to discuss, among other things, the Trans-Pacific Partnership. Chung Sung-Jun—Getty Images

Washington needs to realize that a free-trade agreement with Asia is good for us all

We live in a world without war or even significant conflict among the major powers. We also live in an age of economic growth. All of this seems normal, but in fact, it isn’t. The current global system of commerce and collaboration instead of war and competition is historically rare. Will it last?

The answer depends largely on Asia, which within 10 years will be home to three of the world’s four largest economies. There are two possible scenarios. The first is that Asian countries will embrace the open, rule-based free-trade system in place today and deepen it. The second is that as these countries grow rich, they will become more nationalist, focus on narrow interests, pursue mercantilism and thus erode if not destroy what some in those countries describe as the “Western international order.”

This is not a theoretical debate; a great game is afoot in Asia. The U.S. wants to strengthen the forces of openness, rules and free trade by concluding an ambitious trade agreement with many Asian countries, the Trans-Pacific Partnership (TPP). China, on the other hand, is proposing the Regional Comprehensive Economic Partnership, a more mercantilist deal for Asian countries. It asks very little of these countries in terms of commitment to real market-based reforms or to environmental and labor standards. It offers them greater access to China as a gift from Beijing. This might advance China’s narrow interests, but it does little for an open, rule-based regional order.

Most Asian countries will naturally sign up to expand into the Chinese market. But they are willing to make painful concessions to sign up for America’s vision of the region. Japan’s Prime Minister, Shinzo Abe, told me recently that he was willing to take on some of his country’s most protected sectors as part of the TPP. But it’s in the U.S. that the American vision has become more cloudy. Congressional Democrats have virtually abandoned free trade, and Republicans balk at supporting President Obama.

The economic reason for Washington to support both the TPP and another ambitious trade agreement with European countries, the Transatlantic Trade and Investment Partnership, is obvious. The U.S. market is already wide open. Last year, 68% of the value of goods entered duty-free. The rest came in at an average tariff of 4.4%. Any agreement will require other countries to make many more concessions than the U.S. simply because their markets remain much more closed. And both trade deals open up markets in other tough areas, like intellectual property, state-owned companies and what are called nontariff barriers (regulations that have the effect of protecting inefficient local industries).

Even in deadlocked Washington, there is a path forward. Republican Congressional leadership remains committed to free trade. Former GOP officials like Robert Zoellick have made a persuasive case for why the party should strongly support both deals. Democratic opposition is not quite as devastating as it appears at first glance. Harry Reid, for example, voted against all three recent trade agreements, but did not obstruct their passage. The number of House Democrats who voted for these deals ranged from 31 to 66; garnering such a range again might still be possible.

Still, the democratic party’s retreat on free trade over the past two decades has been utterly dispiriting and totally at odds with its claim to be modern, future-oriented and open. It’s also at odds with the party’s history. There is FDR nostalgia among Democrats these days as they consider how he battled a depression, created the social safety net and made assertive government admirable. But Democrats forget another crucial element of his legacy: free trade. In a smart essay for the Council on Foreign Relations, Douglas A. Irwin points out that the “fast track” authority–empowering the President to negotiate trade deals–that Reid and Nancy Pelosi oppose was created by the Roosevelt Administration in 1934. FDR and Secretary of State Cordell Hull knew that free trade helps produce not just prosperity but also peace. In fact, free trade was one of Woodrow Wilson’s 14 Points to remedy the mistakes that led to World War I.

Free trade has always required an assertion of the national interest over special interests. Harry Truman vetoed a bill that tried to kill the nascent world trading system. John Kennedy took on domestic producers who feared foreign competition as he expanded that system substantially. And Bill Clinton heroically took on his party’s opposition to NAFTA and turned much of it around.

President Obama will have to spend real political capital, take his case to the country, push his party and work with Republicans. But if he does, history tells us that he–and the U.S. and the world–will win.

TO READ MORE BY FAREED, GO TO time.com/zakaria

TIME Economy

5 Years After Stimulus, Obama Says It Worked

U.S. President Barack Obama delivers his State of the Union speech on Capitol Hill in Washington
U.S. President Barack Obama delivers his State of the Union speech on Capitol Hill in Washington, D.C., on Jan. 28, 2014. Larry Downing—Corbis

Five years ago Monday, President Barack Obama visited the Denver Museum of Nature and Science to sign the American Recovery and Reinvestment Act, his $800 billion stimulus bill. At the time, the U.S. economy was losing 800,000 jobs a month. In the fourth quarter of 2008, it had contracted at an 8% annual rate, a Depression-level free fall.

“Today does not mark the end of our economic problems,” Obama said on Feb. 17, 2009. “But it does mark the beginning of the end.”

And so it did. The stimulus quickly became a national joke, mocked by the right as a massive boondoggle and by the left as a pathetic pittance. A year after it passed, the percentage of Americans who believed it had created jobs was lower than the percentage of Americans who believed Elvis was alive. But after an epic financial crisis, the Recovery Act did launch a recovery. The economy started growing again in summer 2009. It started adding jobs again in spring 2010.

This week, the White House will release a report documenting how the stimulus spelled the difference between contraction and growth for much of Obama’s first term. Politically, the White House lost the argument over the stimulus long ago, but for Recovery Act obsessives — O.K., maybe I’m the only one — it’s still nice to see the facts in black and white.

Q2Quarterly Effect of theRecovery Act and Subsequent Fiscal Measures on GDP, 2009–2012
Bureau of Economic Analysis, National Income and Product Accounts / Congressional Budget Office / CEA calculations

The main conclusion of the 70-page report — the White House gave me an advance draft — is that the Recovery Act increased U.S. GDP by roughly 2 to 2.5 percentage points from late 2009 through mid-2011, keeping us out of a double-dip recession. It added about 6 million “job years” (a full-time job for a full year) through the end of 2012. If you combine the Recovery Act with a series of follow-up measures, including unemployment-insurance extensions, small-business tax cuts and payroll tax cuts, the Administration’s fiscal stimulus produced a 2% to 3% increase in GDP in every quarter from late 2009 through 2012, and 9 million extra job years, according to the report.

The White House, of course, is not an objective source — Council of Economic Advisers chair Jason Furman, who oversaw the report, helped assemble the Recovery Act — but its estimates are in line with work by the nonpartisan Congressional Budget Office and a variety of private-sector analysts. Before Obama took office, it would have been a truism to assert that stimulus packages stimulate the economy: every 2008 presidential candidate proposed a stimulus, and Mitt Romney’s proposal was the most aggressive. In January 2009, House Republicans (including Paul Ryan) voted for a $715 billion stimulus bill that was almost as expansive as Obama’s. But even though the stimulus has been a partisan political football for the past five years, that truism still holds.

The report also estimates that the Recovery Act’s aid to victims of the Great Recession — in the form of expanded food stamps, earned-income tax credits, unemployment benefits and much more — directly prevented 5.3 million people from slipping below the poverty line. It also improved nearly 42,000 miles of roads, repaired over 2,700 bridges, funded 12,220 transit vehicles, improved more than 3,000 water projects and provided tax cuts to 160 million American workers.

My obsession with the stimulus has focused less on its short-term economic jolt than its long-term policy revolution: I wrote an article about it for TIME titled “How the Stimulus Is Changing America” and a book about it called The New New Deal. The Recovery Act jump-started clean energy in America, financing unprecedented investments in wind, solar, geothermal and other renewable sources of electricity. It advanced biofuels, electric vehicles and energy efficiency in every imaginable form. It helped fund the factories to build all that green stuff in the U.S., and research into the green technologies of tomorrow. It’s the reason U.S. wind production has increased 145% since 2008 and solar installations have increased more than 1,200%. The stimulus is also the reason the use of electronic medical records has more than doubled in doctors’ offices and almost quintupled in hospitals. It improved more than 110,000 miles of broadband infrastructure. It launched Race to the Top, the most ambitious national education reform in decades.

At a ceremony Thursday in the Mojave Desert, Energy Secretary Ernest Moniz dedicated the world’s largest solar plant, a billion-dollar stimulus project funded by the same loan program that financed the notorious Solyndra factory. It will be providing clean energy to 94,000 homes long after Solyndra has been forgotten. Unfortunately, the only long-term effect of the Recovery Act that’s gotten much attention has been its long-term effect on national deficits and debts. As the White House report makes clear, that effect is negligible. The overwhelming majority of the Recovery Act’s dollars have gone out the door; it’s no longer adding to the deficit. It did add about 0.1% to our 75-year debt projections, but allowing the economy to slip into a depression would have added a lot more debt.

The real long-term danger is that the Recovery Act became so unpopular so quickly that future politicians might shy away from stimulus packages. Europe quickly embraced austerity, which is one reason the unemployment rate in the euro zone is almost twice as high as ours. Historically, recoveries in the U.S. have been much stronger and faster, and from much less damaging financial crises. This time it hasn’t been as strong as it should have been, partly because of austerity fever among Republicans, stimulus discomfort among Democrats, and deep budget cuts at the state and local level. The political pendulum has swung back toward austerity, producing the “sequester” and other anti-stimulus.

But the report is a reminder that the Recovery Act succeeded in creating jobs, boosting growth and saving us from a much worse fate. We’re still healing from the worst crisis in 80 years, but we’re well past the beginning of the end.

TIME Federal Reserve

Even If Janet Yellen Is Wrong About the Economy, She Is Right About Fed Policy

Janet Yellen makes her first appearance before Congress as the chair of the Federal Reserve
J.M. Eddin—MCT/Getty Images

Janet Yellen’s first testimony on Capitol Hill was a resounding success. She was poised, confident in her decisions, and clear about her intentions at the Federal Reserve. But it was not so much what she said as what was behind it that makes it a tour-de-force performance and shows us that our monetary policy is in the hands of a capable leader.

After some initial tumult, the market has come to accept the scaling back of the Fed’s bond-buying program and can even see the many benefits of a taper: higher interest rates will discourage excessive borrowing, prevent the formation of new asset bubbles, and stabilize our economic growth at a realistic level that is fueled by real value creation and not the availability of cheap money.

Of course, if the economy really is weaker than anticipated – as the recent jobs report, which showed that only 113,000 jobs were added to the US economy in January, might indicate, then the contraction of money supply could slow down the recovery and reverse the trend of declining unemployment. In her testimony, Yellen expressed confidence about the economy but acknowledged that unemployment is still high and that a large number of people have been unemployed for an extended period of time.

And yet she opted to stick with the taper. There are two very good reasons for this.

What Yellen recognizes is that the most powerful tool in the Fed’s toolbox is its credibility. In order for monetary policy to work at all, it is imperative that the markets believe what the Chairman of the Fed says, and be able to rely on the guidance that the Fed gives to price securities. Any wavering by the Fed can lead to mispricing of both stocks and bonds and create volatility. That is precisely what happened late last year when Yellen’s predecessor, Ben Bernanke, flip-flopped on the taper. He first indicated that he would and then, after the markets plummeted, changed his mind. It led to immense confusion, which was probably good for day traders and arbitrageurs, but a disaster for regular investors, who require visibility and reliability.

Yellen knows that even if she has to reverse course later this year, she is better off doing it in response to undeniable market conditions (when a reversal will be expected anyway) than doing it on a whim now, which would damage the Fed’s credibility in the eyes of investors and make its future guidance ineffective.

A sudden easing of monetary policy now would also cause over-exuberance in the stock market as the anticipation of cheaper capital fuels a buying spree, and create a bubble. Moreover, a drop in interest rates will not automatically spur lending by banks, who were hesitant to lend even in 2013 when the Fed stimulus was in full swing. This casts serious doubt on whether our economy, and consequently the job market, would actually benefit from a reversal of the Fed’s taper at all.

Only time will tell whether Yellen’s assessment of the current state of our economy is correct, but she is definitely right about policy.

Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius. Sanghoee sits on the Board of Davidson Media Group, a mid-market radio station operator, and has an MBA from Columbia Business School. He is also the author of two thriller novels.

TIME Economy

America’s Gargantuan Share of Global Wealth, in One Map

How the wealth of 50 US states measures up to 50 nations

How does the U.S. economy measure up to the rest of the world? You could find out by poring over a table of GDP figures, or you could get a snap perspective from this map, which renames every U.S. state according to a country with a matching GDP.

One million Rhode Islanders have as much wealth as 15 million Guatemalans. Texas has an economy the size of Australia’s. And New York has met its match, Mexico.

The map from economist Mark J. Perry at the American Enterprise Institute puts America’s $16 trillion GDP in perspective. “The map and these statistics help remind us of the enormity of the economic powerhouse we live in,” Perry writes, at least to the 4% of the world’s population that lives there.


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